Accounting Methods — Cash and Accrual

When starting a business, you have to determine the method you are going to use for accounting and paying taxes. The two choices are the cash method and the accrual method.

Cash Method

If you are looking for simplicity, the cash method is probably your best accounting choice. Generally, income and deductions can be claimed when payment is actually received or made. This is best shown with an example.

I open a small business and have to order business cards and stationary. I receive the products and pay the invoice on November 18, 2005. Under the cash method, I can deduct the cost on my 2005 tax return.

Some businesses are restricted from using the cash method. C corporations may only use the cash method if they have less than $5 million in gross revenues for a particular year. Professional Service Corporations can use the cash method without limit, while farming corporations can due so if gross revenues are less than $25 million. Tax shelters are prohibited from using the cash method.

Accrual Method

The Accrual Method of accounting is a bit more complex. Under this method, the focus in on the date the expense is incurred, not paid. Although this may seem a small difference, it can play havoc with your books and piece of mind.

Using our previous example, assume I order business cards and stationary on the December 18, 2005. I receive the products on December 30th, but don't pay the invoice until January 20, 2006. When can the expense be claimed? It depends on when economic performance occurred.

Generally, economic performance occurs when goods or services are provided to you. In the above example, economic performance would arguably occur when the business cards and stationary were delivered with the invoice on December 30th. Thus, I would be able to deduct the expense for the 2005 tax year.

In Closing

As you can see, the cash method is the easier of the two accounting methods. To determine the best method for your business, speak with a tax professional.


About the author:
Richard Chapo is with Business Tax Recovery - Stop overpaying small business taxes. Read more business tax articles.

More Resources

Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 403, exiting

More Accounting Information:

Related Articles

Do You Need Accounting Software For Your Small Business
If you're anything like me then you dislike with a vengeance doing your accounts and taxes.
Do You Think That Your Workload Is Hampering Your Killer Marketing Activities?
You need an extra effort not the extra workload. Today when competition is high and consumers have many options to choose, an extra effort towards improvement of your product, managing your customers and taking care of other aspects of your business will give you advantage over your competition. You need to multiply your time may be you can keep your margin low, but will give you more volume and increase in your turnover.
Explode Your Consulting Income
Here are just a few ways to increase and diversify your income from your consulting business.
Five Leadership Secrets for Challenging Times
We consistently face new and ever growing challenges in the workplace such as reorganizing, downsizing, and "left out sizing." We are faced with the question, "How do we lead in this storm of change?" It may seem difficult at times and the decisions we make define our short-term and long-term outcomes. I will share with you five leadership techniques guaranteed to keep you on track during these difficult times.
Five Reasons to Incorporate a Company Offshore
When it comes to the term 'offshore' used in conjunction with company incorporation, the term 'offshore' generally refers to any jurisdiction other than one in which the company incorporated will conduct the majority of its activities.
Four Simple Steps To Better Results With Your Resume
Is every job description you read the same? No.
How to Choose the Right Accounting Software for Your Business
With any good luck and a good amount of hard work, you're having the same problem many business owners today are facing. Your business is growing rapidly and you're having problems controlling your finances. Time and time again, that Microsoft Excel spreadsheet you've been using just isn't getting the job done for you.
Bookkeeping
Bookkeeping is an essential skill which must be mastered before running a business of your own. It is not only important for tax returns and calculating the overall tax liability of your business each year, but it is also imperative for cash flow analysis and financial forecasting.
See Your Business Excel With Accounting Help
A known fact in the corporate or the business world is that the accountancy department of any firm or organization is the most vital department. When a business is set up, the person setting up the business thinks about the profits that the firm might make in the future.
Why Conventional Financial Statements Do Not Answer All Questions
An integrated understanding all of all the three components of a financial statement - Income statement, Balance sheet and a Cash flow statement is required to understand the operations of any business.
Check Out What A Cash Flow Statement Does Not Tell You
Cash flow statements alone do not tell you the whole story. Just knowing that cash has increased or decreased by X dollars does not tell us the whole story.
Spend Your Profit on Your Business
Businesses go under or go bankrupt, because of poor management and poor mapped out goals. You need to have a clear set of daily goals. Management should be in charge of making sure each set of goals is achieved. If management falls behind, so does the business.
Earn More With The Help Of Small Business Accounting
Handling accounts of any business is a Herculean task and requires quite a lot of expertise on the part of any accountant or bookkeeper. Due to the lack of time and hurry, many big or small organizations are approaching small business accounting firms, as these are more capable and also offer perfect solutions to any firm's accounting woes.
What Is GGAP And Why Is It So Important
GAAP is an acronym for generally accepted accounting principles. Financial statements are usually prepared in accordance with generally accepted accounting principles that have been codified over a period of time. It is the responsibility of the management to prepare the financial statements.
How To Read Financial Statements - Understanding Cash Flows
Cash flows, both inflows and outflows are the heartbeat of any business. Various groups of people focus on this. Lenders and investors, business managers and last but not the least, investors.