As a new small-business owner you must make a decision between using accrual or cash accounting methods. Regardless of which method you choose, you must use it consistently.
The accrual accounting method requires that you record business activity when it occurs, whereas activity is recorded as soon as money changes hands under the cash method.
For example, let’s say that you provide Web site design. Using the cash method, you would record income only when you receive payment from your customers. Under the accrual method, you would record income when the obligation exists for your customer to pay you; that is, when the work is completed and you invoice your customer.
In most cases, both of these methods are acceptable for financial statements and for preparing your tax return. If your business has inventory, however, you must use the accrual method for your taxes. If your business is a C corporation or a partnership that has a C corporation as a partner, you also must use the accrual method. There are, of course, certain exceptions to this rule for small companies, so it’s best to consult with your accountant before choosing the method that’s right for your business.
Gene Fairbrother ShopTalk 800® Business Consultant National Association for the Self-Employed Dallas, Tex.