Q.Do I select the Cash or Accrual method of accounting?
A.Most businesses must decide whether to use a cash or accrual method of accounting to record sales and purchases. However if you do not extend credit to your customers (payment due Net 30) and if you do not buy on credit, then by default you are using the cash method of accounting. If, on the other hand, you do buy or sell on credit, the method you choose will generally only affect those transactions that occur toward the end of the calendar year.
The IRS has provided the following three rules for businesses that buy or sell on credit:
- If your gross annual sales are $1 million or less, you can choose either the cash or accrual method of accounting.
- If your gross annual sales exceed $1 million and you have inventory (goods, parts, etc...), then you must use the accrual method of accounting.
- If you opted for corporate taxation and have gross annual sales of $5 million or more, then you must always use the accrual method of accounting.
For most small businesses, the difference between cash and accrual only makes a marginal difference. The difference will only impact those transactions occurring toward the end of the year. As a general rule of thumb, if your gross sales are less than $1 million a year, the easiest method is the cash method of accounting. However, consult your accountant, or a tax specialist, to determine which method of accounting would best serve your businesss.
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