Choosing Between Cash and Accrual Accounting Strategies
While operating your small business, you have the ability to choose between cash and accrual accounting practices. The IRS recognizes both of these accounting practices as valid ways to track income and expenses. The difference lies in the way accountants record the line items while tracking the financial status of your company. Here’s what you need to know before choosing between these two accounting methods.
Accrual accounting is the method chosen most often by small business owners due to its straightforward approach. With this method, each transaction is recorded when they are made, whether or not money changed hands at that point.
To create a full picture of your company’s financial health, you would want to use accrual accounting. This method covers not only cash transactions, but credit as wel
l. The accrual method paints a relatively clear picture of your sales figures across the entire year without the spikes of activity that occur with cash accounting. Unfortunately, this method is highly complex and difficult to maintain without assistance from an accounting professional.
With cash accounting, the transactions in Missouri are only recorded once actual funds are exchanged to complete the contract. Pending accounts are not recorded until money actually changes hands, which can negatively impact taxes if the payments fall on an undesirable date. Your overall picture of financial health may have big spikes and dips that can make your business look like it is booming one month and failing the next.
If your company does not extend a lot of credit or hold extensive inventory bought with credit, however, you can use this method to your benefit. With cash accounting, you can push payments into a particular quarter or month to manipulate your taxable income while remaining within the rules established by the IRS.
Establishing Your Accounting Strategy
To acquire help with the establishment of cash or accrual accounting methods, contact the team at accountRely in St. Louis, MO. Your accounting professionals will walk you through the options and help you select the tracking method that will best benefit your company in the long run.