Accounting Methods - Cash and Accrual

When starting a business, you have to determineThe Accrual Method of accounting is a bit more
the method you are going to use for accountingcomplex. Under this method, the focus in on the
and paying taxes. The two choices are the cashdate the expense is incurred, not paid. Although
method and the accrual method.this may seem a small difference, it can play
Cash Methodhavoc with your books and piece of mind.
If you are looking for simplicity, the cash methodUsing our previous example, assume I order
is probably your best accounting choice. Generally,business cards and stationary on the December
income and deductions can be claimed when18, 2005. I receive the products on December
payment is actually received or made. This is best30th, but don't pay the invoice until January 20,
shown with an example.2006. When can the expense be claimed? It
I open a small business and have to orderdepends on when economic performance
business cards and stationary. I receive theoccurred.
products and pay the invoice on November 18,Generally, economic performance occurs when
2005. Under the cash method, I can deduct thegoods or services are provided to you. In the
cost on my 2005 tax return.above example, economic performance would
Some businesses are restricted from using thearguably occur when the business cards and
cash method. C corporations may only use thestationary were delivered with the invoice on
cash method if they have less than $5 million inDecember 30th. Thus, I would be able to deduct
gross revenues for a particular year. Professionalthe expense for the 2005 tax year.
Service Corporations can use the cash methodIn Closing
without limit, while farming corporations can dueAs you can see, the cash method is the easier of
so if gross revenues are less than $25 million. Taxthe two accounting methods. To determine the
shelters are prohibited from using the cashbest method for your business, speak with a tax
method.professional.
Accrual Method