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Two Accounting Methods For Local Businesses

April 23, 2012 | Comments: 0 | Views: 252

One thing to consider when you are about to start a new business is to decide which accounting and tax payment method you are going to use. One way is called the cash method, the other the accrual method.

The Cash Method.

The cash method is the best choice if you are searching for a quick and simple accounting package. You can claim for income and deductions when payments have been made or received.

It is best described showing you an example: You want to open a local business and need to order some stationary and business cards in order to promote your business. You take possession of the stationary material and pay the invoice on April 18, 2011. Using the cash method, you can make deductions of the costs on your 2011 tax returns.

There are some restrictions on businesses from using this cash method. Gross revenues for a certain year need to be less than $5 million for C corporations to be able to use the cash method. Farming corporations are allowed to use this method if their gross revenue is less than $25 million. There are no limits for service corporations utilizing the cash method. Tax shelters may not use the cash method.

The Accrual Method

Accounting using the Accrual Method is more difficult to implement. Using this method the main focus is set on the date on which the expenses were incurred and not the payment date.

Looking at it, it may seem a nonsense but this little difference can cause an awful lot of problems when getting your books sorted out. Again looking at the example talked about previously when ordering the stationary and business cards say you order them on 15 December 2010. You take possession of the stationary on the 30th December but you do not complete payment until the 20th January 2011.

The phrase used is, it depends on when the economic performance was incurred. This can be an influence when the expense can be claimed. Simply put economic performance occurs when you actually receive the products or services ordered.

The date would be 30th December using our example above. Where economic performance would have occurred on this date. You would therefore be able to deduct your expense for the 2011 tax year.

Summing It All Up.

Out of the two accounting methods the cash method is the easier to implement. But to make sure you use the most efficient method available for your new business, have a meeting with your local accounting specialist.

Whichever accounting method you decide to take with your new business it is recommended you take additional expert advice from your local accountants Worthing UK office if you are based in the area click on the following link to visit our website for more detailed information

Source: EzineArticles
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Cash Method


Accounting Methods


Accrual Method


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Local Businesses

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