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Client Alert - Spring 2008

Cash or Accrual
The choice matters in business


When you start a business, you have many decisions to make. One of those is the method of accounting your business will use for reporting income and expenses on your tax return. It is an extremely important decision. With few exceptions, the method you choose can only be changed in the future with the IRS's permission.

The two methods generally used are the cash method and the accrual method. The cash method recognizes income when you receive a payment from a customer, and a deduction is taken when you pay a bill.

The accrual method recognizes income when the services are rendered or the product is sold, despite the fact that you may not get paid for several months. You have "accounts receivable" in the form of money customers owe you. Expenses are handled the same way. If you buy something today, but don't pay for it until later, maybe even next year, you would deduct the cost now. What you owe for purchases you've made constitutes your "accounts payable."

New business owners should review the pros and cons of each method and decide what will work best for them. (Many businesses are required to use the accrual method for tax reporting.) For any assistance you need, give us a call.

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