Accounting Methods - Cash and Accrual
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When starting a business, you must determine the method you will use for accounting and pay taxes. Two choices are cash methods and accrual methods.
If you are looking for simplicity, the cash method is probably your best accounting choice. In general, income and cutting can be claimed when payments are completely accepted or made. This is best indicated by example.
I opened a small business and had to order a business card and stationery. I received the product and pay invoices on November 18, 2005. Under the cash method, I can reduce the cost of a tax return in 2005.
Some businesses are limited to using cash methods. C corporations can only use cash methods if they have gross income of less than $ 5 million for a certain year. Professional service companies can use unlimited cash methods, while agricultural companies can mature so if gross income is less than $ 25 million. The tax sanctuary is prohibited from using the cash method.
The accrual accounting method is a little more complex. Under this method, focus on the date of costs incurred, not paid. Even though this might seem a little different, it can play chaos with your book and sepump.
Using our previous example, assume I ordered a business and stationary card on December 18, 2005. I received the product on December 30, but don't pay invoices until January 20, 2006. When can it cost? It depends on when economic performance occurs.
In general, economic performance occurs when goods or services are given to you. In the example above, economic performance can be said to occur when business cards and stationary are delivered with invoices on December 30. Thus, I will be able to reduce costs for the 2005 tax year.
As you can see, the cash method is easier than two accounting methods. To determine the best method for your business, talk to a tax professional.