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.

Richard Chapo is with http://www.businesstaxrecovery.com - recovering overpaid taxes for small businesses. Visit our article page - http://www.businesstaxrecovery.com/articles - to read more tax articles.

---

To Buy A Fat Pig

What does buying a fat pig have to do with... Read More

Is Brick and Mortar A Passing Fad?

Q: Is the online world the best place to sell... Read More

The PR Commitment to Small Business

We're birds of a feather, public relations and small business.... Read More

Where to Find a Cash Windfall of $10,000 to $1,000,000 -- You Never Knew You Had

There is a rather famous true story called "Acres of... Read More

Top Ten Resolves for Building Your Business in 2005

1. Resolve to build a consistent network system.Since referrals are... Read More

FTC Adding to the Franchise Rule

Last summer the FTC put forth a report and then... Read More

Alliances: What works, what does not

Why Alliances FailWhen do you know an alliance is falling... Read More

Common Mistakes When Planning Your Medical Spa

Everything starts with a business plan: If you don't have... Read More

The 5 Traits of Baby Boomer Business Owners

As a practitioner and student of Small Business Marketing, I... Read More

Self-Employment: Managing Your Money: Tips for Living with a Fluctuating Cash Flow (Part One)

The way you manage your money is one of the... Read More

California Department of Corporations Attempts to PR Their Benefits to Consumers

On Monday the Department of Corporations in California revoked franchise... Read More

Contract Cleaners ? A Guide for Business Part 2

In the first part of this article I put forward... Read More

10 Cardinal Rules for Business Growth

After over 30 years of participating in hundreds of businesses,... Read More

Fire the CEO

If you are the boss and you think your job... Read More

Is Your Business Making Money?

Is your business making money? Would you know?Figuring out whether... Read More

Franchising in The Middle East There Will Bring Significant Opportunity for US Based Franchisors

As stability emerges in the Middle East there will be... Read More

Small Business Secrets: Self-Confidence Can Be Arranged

At first blush this idea might be difficult to wrap... Read More

Three Big Barriers To Small Business Marketing Success

When you feel like you're always busy working on your... Read More

Hone Your Edge, Stay Focused

A common hazard faced by new entrepreneurs is a lack... Read More

Advertising - For Small Businesses (Part 1)

Is it right for you?If you decide to advertise your... Read More

The Responsibility Conundrum - Where art Thou?

Mr/Ms, 'not me' is often on holidays in your business.... Read More

Knowledge is Power

Why does research and education play an important part of... Read More

Beating the Small Business Cash Flow Blues

Small business owners can relieve a lot of their own... Read More

Profits are within 6 Degrees of Freedom

How far away is the person you need to meet?We... Read More

Bad Regulators Cost Small Businesses

When a regulator finds a target to go after to... Read More

Genius Time? It Matters

I frequently give presentations at small business gatherings, providing me... Read More

Excuses Franchisees Make; When They Violate Exclusive Territory Agreements

One of the biggest excuses franchisees of home based and... Read More

Setting Up as an Electronic Repair Authorized Service Center

If you plan to upgrade your workshop into an Authorized... Read More

Starting a Virtual Assistant Business

If you're organized, smart, capable and willing to work with... Read More

Making Your Purpose Your Business Step #2- Getting From Point A to Point B

In my previous article, Step 1, your challenge for the... Read More

Fleet Washing Expansion Considerations

Many times small businesses want to expand their businesses and... Read More

Low Cost or Highly Funded Start Up

Many new ventures are preoccupied with all the money they... Read More

7 Cash Flow Secrets Your Accountant Never Told You

Looking for ways to boost your cash flow? As a... Read More