When starting a business, you have to determine which method to use for accounting and paying taxes. The two options are the cash method and accrual method.
Cash Method
If you are looking for simplicity, the cash method is probably your best option accounting. In general, income and deductions can be claimed when payment is actually received or made. This is best shown by example.
I open a small business and have to order business cards and stationery. I can take delivery and pay the bill on November 18, 2012. Under the cash method, you can deduct the cost on my 2012 tax return.
Some companies can not use the cash method. C corporations may only use the cash method if less than $ 5 million in gross revenue in a given year. Professional Service Corporations can use the cash method without limit, while farming corporations can 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, focusing on the date on which expenses are incurred, not paid. Although this may seem a small difference, can wreak havoc on their books and quiet.
Using our previous example, 2011. I can take delivery on 30 December, but do not pay the invoice until January 20, 2012. When can claim the expense? It depends on when economic performance occurred.
In general, economic performance occurs when goods or services are provided to you. In the above example, you could say that the economic results that occur when business cards and stationery is supplied with the invoice on 30 December. Therefore, I would be able to deduct the expense for fiscal year 2012.
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, contact a tax professional.
April 05, 2011, 02:43:15 AM