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Accounting Methods – Cash also Accrual |
by:
Richard A. Chapo |
When starting a business, you have to determine the method you are going to use for accounting also paying taxes. The two choices are the cash method also the accrual method.
Cash Method
If you are looking for simplicity, the cash method is probably your best accounting choice. Generally, income also deductions can be claimed when payment is actually received or made. This is best shown with an example.
I open a small business also have to order business cards also stationary. I receive the products also 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 also piece of mind.
Using our previous example, assume I order business cards also stationary on the December 18, 2005. I receive the products on December 30th, however 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 also 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.
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