for more articles
Accounting Methods Ė Cash and Accrual
Richard A. Chapo
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.
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.
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 donít pay the invoice until January 20, 2006.
When can the expense be claimed? It depends on when economic performance
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.
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
Circulated by Article