When starting a business, you have to watch the method you are going to use for accounting and paying taxes. The two choices are the change method and the accrual method.

Cash Method

If you are looking for simplicity, the change method is probably your best accounting choice. Generally, income and deductions crapper be claimed when payment is actually received or made. This is best shown with an example.

I open a diminutive business and have to order business game and stationary. I receive the products and pay the invoice on November 18, 2007. Under the change method, I crapper deduct the cost on my 2007 tax return.

Some businesses are restricted from using the change method. C corporations may only use the change method if they have less than $5 meg in gross revenues for a particular year. Professional Service Corporations crapper use the change method without limit, while farming corporations crapper cod so if gross revenues are less than $25 million. Tax shelters are prohibited from using the change method.

Accrual Method

The Accrual Method of accounting is a bit more complex. Under this method, the focus in on the date the expense is incurred, not paid. Although this may seem a diminutive difference, it crapper play havoc with your books and piece of mind.

Using our previous example, assume I order business game and stationary on the December 18, 2006. I receive the products on December 30th, but don’t pay the invoice until January 20, 2007. When crapper the expense be claimed? It depends on when economic action occurred.

Generally, economic action occurs when goods or services are provided to you. In the above example, economic action would arguably become when the business game and stationary were delivered with the invoice on December 30th. Thus, I would be healthy to deduct the expense for the 2007 tax year.

In Closing

As you crapper see, the change method is the easier of the two accounting methods. To watch the best method for your business, speak with a tax professional.