When setting up your business, which method is right for you?
Small businesses are required to determine if they will file as a cash or accrual based business when they submit their first taxes. Deciding if you should elect to be a Cash or Accrual based business may seem like a simple question for the seasoned accountant, but unlike the accountant, not everyone gets excited about Debits and Credits. (More on why I put “File” in bold later).
Before I get into which might be right for you, let me give a very overly simplified explanation of the two types:
Cash: We record revenue when we receive money from the customer. We record an expense when we pay the vendor.
Accrual: We record revenue when we earn money from the customer. We record an expense when we incur the expense.
If you want more info on these terms, search YouTube and there are hundreds of videos on this topic.
Which method should I elect with the IRS?
Presuming you meet the criteria outline in IRS Publication 538, most Sole Proprietors and Single Member LLCs should file as a cash based business. This makes filing for taxes much easier on you and your accountant at year end, saving you time and money.