- 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 to 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 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 company’s financial health that the cash basis cannot achieve.
The cash basis ability for the deferral of transactions which 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 DSJCPA 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.