Cash vs Accrual Accounting: How It Affects You During Tax Season
When it comes to businesses accounting methods, they have the option of going with the cash method or the accrual method. Both methods are acceptable yet they both affect you differently when it comes time to file your taxes.
The Cash Method
Most small businesses use the cash method. This method means they do not count the income until the money has actually been received and they do not document expenses until they have been paid.
The Accrual Method
The accrual method means that you document income when an order is placed and you document expenses when a service is purchased. You do not have to wait for the money to be paid in order for it to be documented in your finances. When using the accrual method it can be hard to document when a sale or purchase has been made.
Which Method to Use
If you have a small business that makes less than $5 million annually, you can go with either method. However, if your business makes more than $5 million annually or you have more than $1 million in inventory annually you have to choose the accrual method.
How Taxes Work
Regardless of which method you are using, you have to only document the sales and expenses that took place in the current tax year. Therefore, when using the cash method you would not be able to claim everything because they can only be documented when money exchanges hands. However, with the occur method you would be able to claim everything since you record your transactions when they occur.
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