I have seen plenty of Parma businesses get into hot water because they were using the wrong method to track their cash.
Yep, today, let’s talk accounting. 🙂
Specifically, whether your business should operate as CASH or operate as ACCRUAL. Cash is a great option to start. It’s simple. But you can get into hot water, come tax time, or when you tally your profits, if you should be running an accrual business.
Here are some things to consider…
Cash vs. Accrual Accounting: Two Main Differences For Parma Businesses To Consider
“Accounting is the language of business.” -Warren Buffett
Let’s look at a few differentiators between the two and how each could help, or hurt, your Parma business moving forward.
As always, please let me know if you or your accounting team has any questions on this topic. I would love to help in any way I can, or provide resources for further understanding. My goal is for your business to succeed!
The key difference between cash and accrual accounting is largely due to timing.
For instance, cash accounting considers revenue right when the cash is received, and right when you pay expenses. Many businesses opt for cash accounting because it’s easier to keep track of — it’s a simple method especially for entry-level accountants to maintain.
On the other hand, accrual-based accounting keeps track of earnings as opposed to what’s actually been received. Although cash accounting is simple, accrual is more popular because of this timing: businesses consider revenue upon “project completion” instead of waiting to receive the money.
There are tax implications depending on which method you choose. (Again, I would love to help you here!)
The most obvious tax change, between cash and accrual accounting, is in what year the taxes will apply to any given business. A primary example using accrual: invoicing a client in December means the transaction occurred in 2019, even if you don’t get paid until January 2020.
Your accounting team should decide on a method that best suits you, but it’s important to be consistent in whichever you choose. Also, note that some businesses are REQUIRED to use accrual accounting.
Not sure if you fall into that camp? Reach out and let’s discuss your options.
Lastly, you’ll need to file Form 3115 if switching accounting methods. It’s not too difficult, but it is necessary.
Make sure you give this issue its rightful attention, or it could come back to haunt you — even if accounting already shows up in your nightmares. 🙂
I’m grateful for our chance to serve you and your business — and we are dedicated to its success. Which means that we are happy to clean up your mess, if it comes to that.
Can other accountants say that?
Feel free to share this post with a business associate or client you know who could benefit from our assistance. While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for families and business owners.