The National Directory of Certified Public Accountants

Ask A CPA - Business Start-ups

What Accounting Method Should I Use- Accrual Or Cash ?

It is to a small business' advantage to compute taxable income under the cash basis of accounting?. Special relief from the accrual method is available to some taxpayers with average annual gross receipts of $1 million or less. However, many businesses are required to maintain their books and records on the accrual basis of accounting. For example, if a business has inventory, the accrual basis of accounting must be used. The accrual basis of accounting means that the business records income when the product or service is invoiced, not when it is collected. The actual receipt of money is not required. Likewise, bills not paid by the business are recorded in the period incurred. The limitations on the use of the cash basis requires further discussions with a CPA in your community. Many businesses don't realize their exposure with the IRS until they are audited. Failure to comply with accounting rules initially when setting up your business can prove disastrous in later years.

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