Accounting Methods: Cash Basis vs. Accrual vs. Hybrid
Accounting Methods: Cash Basis vs. Accrual vs. Hybrid
Which Method is Most Advantageous for Small Business?
Abstract
Many tax preparers fail to communicate to their small business owner clients about the types of accounting methods allowed by the Internal Revenue Service (IRS) and the advantages and disadvantages of each. The average small business owner simply trusts that the tax preparer is utilizing the method most advantageous to them. This paper explores cash basis, accrual, and hybrid accounting methods approved for tax purposes by the IRS. By comparing and contrasting the advantages and disadvantages of all of the methods, this paper will attempt to will seek to identify the method most advantageous to the small business owner. By using multiple authoritative and non-authoritative sources to compare and contrast the methods, this paper will attempt to simplify the choice of accounting method to be used. Keywords: accounting method, cash basis, accrual basis, hybrid method,
When opening a new business, a small business owner is faced with an enormous amount of decisions to make. One of the most important of those decisions is determining which accounting method they will choose to keep their books. This paper will analyze the accounting methods of cash basis, accrual, hybrid and special accounting methods. It is important to have a thorough understanding of the different methods allowable under the law and how each method differs from the others. The fact is, there is no accounting method that is perfect. Both accounting methods have pros and cons. After carefully evaluating the various accounting methods and the goals of the business, the small business will have to choose which method is the best option. To do this, the business owner must consider the current size of the business, the business plans for future growth, and if third parties such as lenders or shareholders will be involved in the future.
According to Internal Revenue
Which Method is Most Advantageous for Small Business?
Abstract
Many tax preparers fail to communicate to their small business owner clients about the types of accounting methods allowed by the Internal Revenue Service (IRS) and the advantages and disadvantages of each. The average small business owner simply trusts that the tax preparer is utilizing the method most advantageous to them. This paper explores cash basis, accrual, and hybrid accounting methods approved for tax purposes by the IRS. By comparing and contrasting the advantages and disadvantages of all of the methods, this paper will attempt to will seek to identify the method most advantageous to the small business owner. By using multiple authoritative and non-authoritative sources to compare and contrast the methods, this paper will attempt to simplify the choice of accounting method to be used. Keywords: accounting method, cash basis, accrual basis, hybrid method,
When opening a new business, a small business owner is faced with an enormous amount of decisions to make. One of the most important of those decisions is determining which accounting method they will choose to keep their books. This paper will analyze the accounting methods of cash basis, accrual, hybrid and special accounting methods. It is important to have a thorough understanding of the different methods allowable under the law and how each method differs from the others. The fact is, there is no accounting method that is perfect. Both accounting methods have pros and cons. After carefully evaluating the various accounting methods and the goals of the business, the small business will have to choose which method is the best option. To do this, the business owner must consider the current size of the business, the business plans for future growth, and if third parties such as lenders or shareholders will be involved in the future.
According to Internal Revenue
References: Internal Revenue Service. (2012). Accounting Periods and Methods (IRS Publication 538). Washington, DC: U.S Internal Revenue Service. (2012). General Rule for Methods of Accounting ( Title 26- Code of Federal Regulations, Section 1.446-1) Internal Revenue Service. (2012). Business Expenses (IRS Publication 535). Washington, DC: U.S Internal Revenue Service. (2012). Farmers Tax Guide ( IRS Publication 225). Washington, DC: U.S Internal Revenue Service. (2012). Installment Sales (IRS Publication 537). Washington, DC: U.S Internal Revenue Service. (2012). How to Depreciate Property (IRS Publication 946). Internal Revenue Service. (2012). Trade or Business Expenses (Title 26- Code of Federal Regulations, Section 162) Internal Revenue Service. (2006) Taxable Year of Inclusion (Title 26- Code of Federal Regulations, Section 451) Internal Revenue Service. (2002) Internal Revenue Procedure 2002-28 (IRP 2002-28). Internal Revenue Service. (2012) Changes in Accounting Periods and Methods of Accounting (Title 26-Code of Federal Regulations, Section 601.204) Internal Revenue Service. (2012) General Rule for Taxable Year of Deduction (Title 26- Code of Federal Regulations, Section 461)