When starting a business, you must determine the method for accounting and paying taxes. The two choices are the cash method and accrual accounting.
Effective method
If you are looking for simplicity, Cash accounting is probably the best choice. In general, the income and deductions can be claimed when payment is actually received or made. This is best shown as an example.
I open a small business, and ordered business cards and stationary. I get the products and pay the bill November 18, 2005. Less cash, can I reduce the cost of my 2005 tax return.
Some companies can use the cash method. C corporations can use the cash method if they are under $ 5 million in gross revenue for a specific year. Professional services firms can use the cash method without limit, while the farms may be due if the gross income of less than $ 25 million. Tax shelters are allowed to use the cash method.
Accrual
Accrual accounting is a bit more complex. Under this method, the development of the date on which expenses were incurred, not paid. Although this may seem a small difference, it can play havoc with your books and piece of mind.
Using the above example, assume the state of business cards, stationary, and December 18, 2005. I get 30 products in December, but does not pay the invoice by January 20, 2006. To the detriment of the question? It depends on when economic performance occurred.
Generally, economic performance occurs when goods or services for you. In the example above, the economic results may occur when the business cards and stationary were delivered with the invoice on December 30th. Why would I be able to deduct expenses for the 2005 tax year.
Finally
As you can see, Cash is easier for the two accounting methods. To determine the best way for your business, speak with a tax professional.