John J Bowman Jr, and accountant, discusses how businesses can use the cash versus accrual method for their businesses. John J Bowman also details the pros and cons of both methods.
1. CASH
VS.
ACCRUAL
A P R E S E N T A T I O N B Y J O H N J B O W M A N , J R |
A C C O U N T A N T
2. INCOME IS NOT
COUNTED UNTIL
CASH IS ACTUALLY
RECEIVED, AND
EXPENSES ARE
NOT COUNTED
UNTIL THEY ARE
ACTUALLY PAID.
YOU DON' T HAVE
TO HAVE MONEY
IN HAND OR
ACTUALLY PAY
MONEY OUT, TO
RECORD A
TRANSACTION.
VS
ACCRUAL
J O H N J B O W M A N J R | A C C O U N T A N T
CASH
3. J O H N J B O W M A N J R | A C C O U N T A N T
Which method is best for you?
YOU ARE FREE TO CHOOSE WITH A FEW EXCEPTIONS
CHOOSING A METHOD
Small business
Less than $5
million a year
in sales
Cash Accrual
Sales over $5 million per
year
stocks an inventory and
your gross receipts are
over $1 million per year
4. J O H N J B O W M A N J R | A C C O U N T A N T
Cash
Pros & Cons
Pro: provides a more accurate picture of how much actual cash your
business has and you can deduct expenses in the year they are paid
instead of having to wait until the related revenue is earned and reportable.
Con: may offer a misleading picture of longerterm profitability. You also
need to report revenue as soon as payment is received, which means you
may end up paying tax on the gross amount if your deductible expenses
aren’t reported until a future tax year.
5. J O H N J B O W M A N J R | A C C O U N T A N T
Accrual
Pros & Cons
Pro: shows the fluctuation of business income and debts more
accurately.ou can deduct expenses in the year you receive the underlying
service or property and become liable for payment, even if you don’t
actually make payment until a future tax year.
Con: Does not show accuracy in which cash reserves are available. In
addition, you will have to report income in the year your customers have a
legal obligation to make payment, not at the time of actual payment.
Because of this, you may end up paying tax on money you didn’t receive
during the tax year.