- Benefits of the cash and accrual methods
- Why businesses should make the switch and how
| Cash Basis Overview | Accrual Basis Overview |
|---|---|
| The cash basis—praised for its simplicity—is used by few businesses and all individuals for personal accounting. | The accrual method is required for most businesses; though, due to its high accuracy, even businesses with the option between the two tend to apply this method regardless. |
| Benefits of Switching to Cash | Benefits of Switching to Cash |
| One of the biggest benefits of the cash methods is the reduced time and cost spent on implementation and maintenance. The cash basis also allows for more flexibility in regards to tax planning as it allows businesses to defer income and deductions to a future tax year. Finally, since a business’ income is taxed in the same year that it’s received, the cash basis ensures that a business will have the necessary funds to pay its tax bill. | The cash basis is typically a good place to start when accounting for a smaller business, but as the company grows, owners will often make the switch to the accrual basis. Otherwise, after reaching a certain threshold of gross annual receipts, the IRS will require a business to convert. For growing businesses, the accrual basis provides a more accurate gauge of a company’s financial health that the cash basis cannot achieve. The cash basis ability for the deferral of transactions can give false impressions about a company’s financial standing and thus seriously hinder a business’ ability to make clear, actionable decisions. |
How to Make the Switch
Cash to Accrual:
The company must convert its books from cash to accrual
Accrual to Cash:
Make sure business meets all guidelines to switch to the cash basis (namely, income and size restrictions)
To convert to either method, applicants will need to file a Form 3115 and other paperwork required by the IRS.
Talk to your tax advisors at DSJ to decide the best course of action for your business. Call us at 516-541-6549 and visit our website for more news and information.