Consistently File in Either Cash Basis or Accrual Basis Each Year
Consistently File in Either Cash Basis or Accrual Basis Each YearAn accounting method is a set of rules that determine the timing for reporting income and expenses. The two main accounting methods are Cash basis and Accrual basis.
Each method has its advantages. The Cash method is simpler and allows the business owner to have a snapshot of business cash flow. It’s easy to see how much money is in the bank, how much income has been collected, and how much money has been spent during the period on the financial statement. The Accrual method gives the business owner a better understanding of when income is actually earned, who owes the business money, and whether the business was profitable during the period on the financial statements. This perspective is more useful in making business management decisions.
- If your business recognizes income when an invoice gets paid, you are using the Cash method of accounting.
- If your business recognizes income when an invoice is issued, you are using the Accrual method of accounting.
Since most small businesses choose to file tax returns using Cash basis accounting, the default setting in Sunrise is Cash basis. It’s easy to view your financial statements using either Cash or Accrual basis. Go to Settings > Organization. At the bottom of the right-hand column, you can select either the Cash or Accrual accounting method.
The following businesses must use the accrual method of accounting:
- Tax shelters
- C corporations or partnerships with average annual gross receipts exceeding $26 million for the prior three years (2019 and 2020 threshold).
Tip: When your business files its very first tax return, you check a box to tell the IRS which method you are using for tax reporting purposes. IRS approval is required if you want to change accounting methods. Use IRS Form 3115, Application for Change in Accounting Method, to report an elective or required change. In most cases, IRS approval is automatic.
About the Author
Angela DeLong, EA, has been preparing tax returns for individuals and businesses for 40 years, is an Enrolled Agent with the Internal Revenue Service, and is on the verge of retirement. She has a master’s degree in mathematics and enjoys reading, quilting, traveling, and Biblical archaeology. Angie is happily married and has four adult children and two grandchildren.
Sunrise and Lendio do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal, or accounting advice. You should consult a tax, legal, and accounting advisers before engaging in any transaction.
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