How to Know if Your Bookkeeping Should Be on a Cash Basis or Accrual
The cash and accrual methods for accounting affect several aspects of your business, and you must determine which method works best for your situation. Most businesses may choose and indicate the accrual or cash method on the first income tax return filed for the business. The cash method records income when it is received and expenses when they are paid. The accrual method records income when goods or services are provided, even if payment is not received at the same time; and expenses when a bill for the expense is received, even if the bill is not paid immediately.
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Instructions
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Estimate your annual sales for the year. If your sales or gross revenue is less than $5 million, you may choose either method for your accounting. However, if you generate more than $1 million per year in sales and stock inventory products for sale, you must use the accrual method.
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Determine when you wish to recognize income and expenses. There are pros and cons of income and expense recognition for each method. For example, recognizing expenses under the accrual method may generate larger tax deductions, while recognizing income under the accrual method may cause you to owe tax on income you have not received.
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Assess your bookkeeping skills. In general, accounting under the accrual method is more challenging than accounting under the cash method. The cash method is easier to account for because transactions occur and are recorded in a manner similar to how individuals account for transactions in personal bank accounts. If you plan on completing the bookkeeping for your business, you must assess your ability to account for items accurately under the method you choose. However, professional bookkeepers possess the skills required to process your transactions under either accounting method.
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