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