By Judith Ugwumadu | 16 September 2014

US lawmakers have called for the preservation of cash accounting for businesses, warning that a shift towards the accrual method would increase individual taxes, limit job creation and have a negative impact on local economies.

An open letter, written by the American Institute of Accounting Professions on Friday and signed by a bi-partisan majority of the US House of Representatives, stated that the method of cash accounting was simple because income was recognised when it was collected.

The US is currently seeking to reform its federal tax code to overcome hurdles of complexity, inefficiency and economic growth. The aim is to make the tax code simpler, fairer and easier to administer.

‘While we believe reforms to the tax code should provide a simpler and fairer tax system, requiring the use of the accrual method for entities currently using the cash method will not achieve these goals,’ the letter stated.

‘As we seek to best represent the concerns of the constituents in our districts, we strongly urge you to preserve the cash method of accounting.’

The AICPA explained that the accrual method of accounting recognised when a service was performed, regardless of when cash was collected. It said that the timing for receiving payment was unknown and could even be delayed by months or years after a product or service had been delivered.

The letter warned that proposals requiring a transition from the cash accounting to accrual accounting ‘would have a severely detrimental impact on thousands of businesses in our districts’.

It stated that: ‘Those who use the cash method of accounting include many of our job creators and professionals.

‘If forced to pay taxes before income is received, as would be required under the accrual method, less money would be available to small businesses for growth and job creation.’

Additionally, it noted that cash flow management would become far more complex as a result, and would likely trigger the need for extra outside financing.

It said that: ‘These factors alone would have significant negative impact on our local economies.’

The letter’s sentiments goes against those expressed by the US-based International Federation of Accountants, which has called for a shift towards accrual accounting, particularly for governments.