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What You Need To Know About Using The Cash And Accrual Method For Your Small Business

Many small business owners wonder if they should be using the cash method or accrual method when starting their business. This is a decision that should be made based on the types of services you provide and what works best for you. The important thing is that you choose which method you will use before you structure your company. Here is what you need to know about each method.

Cash Method

The cash method means that you count the income as income only when you are paid for the services or goods. This means that until the cash is in hand, you do not even count that sale or the service on the books.

So for instance, if you own a law office you meet with people every day. You may bill the individual for the services that you provided on April 20th. But the person is delinquent in their bill and doesn’t pay you all the way till September. Even though you billed them all the way back in April, on your books it will show that the service was given in September and you will pay the taxes on the service in September, not in April.

This method works best for people who are in an industry where it is questionable if you will be paid. For example, a lawyer does not receive everything that they deserve. Even though they bill a large amount, they might only receive a fraction of it and some clients just never pay. This means using the cash method would be the best for them.

Accrual Method

The accrual method is different in that you don’t count the cash when you get it but when it was earned. For example, assume that you own a delivery service. This means that people order your boxes and goods and you deliver to them. There is a lapse in the amount of time that it takes for you to get paid, but you generally get paid. For this circumstance, you could use the accrual method. This means that if you delivered goods to the client on December 15th but they didn’t pay you until January 2nd, you will still count the delivery and money earned in December. So on your December books it would show that you made that money. This method works well for many companies and gives a better idea of how much work is done each month, seeing as it charts income based on income earned, not income received.

By understanding the accrual and cash method you can decide what is best for your company. For more information, contact companies like Burns Valkenburg & Associates.