Jan 18 2008
Cash & Accrual Accounting Methods, Did You Know It?
To start a business, you need to determine which method you are going to use for accounting and payment of taxes. The two choices are the method of cash and the method.
Method of Cash
If you like simplicity, the method of the cash is probably your best choice accountants. Generally, income and deductions can be claimed when payment is actually received or made. This is best shown with an example. I opened a small business and ordering business cards and stationary. I receive the goods and pay the bill, November 18, 2005. Under the cash method, I can deduct the cost on my 2005 income tax return. Some companies are restricted from using the cash method. Corporations can not use the cash method if they have less than $ 5 million in gross income for a particular year. Professional service firms can proceed without limit cash, while agricultural societies may be due if the gross income is less than $ 25 million. The tax shelter is prohibited from using the cash method.
Method of Accrual
The method of accounting is a little more complex. Under this method, the emphasis on the date on which the expenditure is incurred, and not paid. While this may seem like a small difference, it can play havoc with your books and peace of mind. Using our previous example, suppose I order business cards and stationary on December 18, 2005. I receive products on Dec. 30, but do not pay the bill until January 20, 2006. When spending can be claimed? It depends on when the economic performance took place. Generally, economic performance occurs when goods or services are provided for you. In the above example, the economic performance which is probably occur when the stationery and business cards were delivered with the bill on Dec. 30. Thus, I would be able to deduct expenses for the fiscal year 2005.
As you can see, the body is the easier way of the two accounting methods. To determine the best method for your business, speak with a tax professional.
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