| There are 2 types of tax accounting methods to | | | | If a company sells expensive products, partial |
| use when submitting business figures to the | | | | payments on long payment plans are generally |
| Internal Revenue Service. These 2 methods are | | | | used. When using accrual accounting this can |
| the cash and accrual methods. Choosing which | | | | reflect the cash flow drastically different. If 3 |
| method you use is determined by the company. | | | | items are sold in one month for $30,000 and next |
| The decision can be as simple as a personal | | | | month 6 are sold for $60,000, it looks like twice |
| preference or many factors can play into the | | | | the income. However, accrual accounting does not |
| selection. Larger companies tend to have many | | | | take the payment plans into account. Payment |
| factors like sale procedure, how many salesmen, | | | | plans could range from 2 payments in 6 months |
| volume of sales, number of sales, inventory, | | | | to 24 payments over 2 years. Usually longer plans |
| when the commission is paid, the percentage of | | | | are needed for larger purchases which will show |
| operations are sales compared to production, | | | | more inaccurate. |
| accountant or business partner experiences, and | | | | Let's say a company just starts and has $30,000 |
| the list goes on. | | | | in sales the first month, but each sale has a |
| Accrual method of tax accounting records all sales | | | | long-term payment plan. Only looking at accrual |
| and transactions at the time of the agreement. | | | | accounting would be misleading because only |
| Even if the money does not exchange hands, | | | | $3,000 was physically obtained. When you look to |
| according to the accounting record books, the | | | | pay bills for operating expenses, accrual |
| sale is complete and accounted for. | | | | accounting will not show how much liquid finances |
| This method takes discipline to make sure all | | | | you have to use. |
| payments are actually received. Since the books | | | | After the tax accounting selection for the accrual |
| show the transaction as complete, a separate | | | | method has been made it is difficult to change |
| ledger must be kept to follow up with payment | | | | methods. If a change is absolutely necessary, |
| plans and collection. This can be especially difficult | | | | there is a way. The last 2 consecutive years |
| for small businesses that may not employ a | | | | must have used the current method. The |
| secretary or accounting staff. With fewer | | | | Secretary of the Treasury must receive a formal |
| numbers of sales, accrual accounting just means | | | | request. The business owner should consult with a |
| more work of entering sales and payments in | | | | certified public accountant to make sure this |
| two separate books. | | | | procedure is done correctly. |