| When starting a business, you have to | | | | cash method. |
| determine the method you are going to | | | | Accrual Method |
| use for accounting and paying taxes. The | | | | The Accrual Method of accounting is a |
| two choices are the cash method and the | | | | bit more complex. Under this method, the |
| accrual method. | | | | focus in on the date the expense is |
| Cash Method | | | | incurred, not paid. Although this may |
| If you are looking for simplicity, the | | | | seem a small difference, it can play |
| cash method is probably your best | | | | havoc with your books and piece of mind. |
| accounting choice. Generally, income and | | | | Using our previous example, assume I |
| deductions can be claimed when payment | | | | order business cards and stationary on |
| is actually received or made. This is | | | | the December 18, 2005. I receive the |
| best shown with an example. | | | | products on December 30th, but don't pay |
| I open a small business and have to | | | | the invoice until January 20, 2006. When |
| order business cards and stationary. I | | | | can the expense be claimed? It depends |
| receive the products and pay the invoice | | | | on when economic performance occurred. |
| on November 18, 2005. Under the cash | | | | Generally, economic performance occurs |
| method, I can deduct the cost on my 2005 | | | | when goods or services are provided to |
| tax return. | | | | you. In the above example, economic |
| Some businesses are restricted from | | | | performance would arguably occur when |
| using the cash method. C corporations | | | | the business cards and stationary were |
| may only use the cash method if they | | | | delivered with the invoice on December |
| have less than $5 million in gross | | | | 30th. Thus, I would be able to deduct |
| revenues for a particular year. | | | | the expense for the 2005 tax year. |
| Professional Service Corporations can | | | | In Closing |
| use the cash method without limit, while | | | | As you can see, the cash method is the |
| farming corporations can due so if gross | | | | easier of the two accounting methods. To |
| revenues are less than $25 million. Tax | | | | determine the best method for your |
| shelters are prohibited from using the | | | | business, speak with a tax professional. |