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Tax Tip: Take Account

Posted: July 18, 2013, 9:30 a.m. EDT

By Mark Battersby

There is no "right” accounting method for all businesses. Both cash accounting and accrual accounting offer pros and cons. The cash-basis accounting method recognizes revenue when money comes into the business and recognizes expenses when money is paid out. Cash basis doesn’t recognize accounts receivable or payable; only when a bill is actually paid does an operation using the cash method of accounting recognize an expense.

Generally, any of these accounting methods are acceptable to the IRS:
• Cash;
• Accrual;
• Special accounting for certain items of income and expenses; and
• A combination using elements of two or more of the above.

Is cash accounting or accural accounting better? iStock/Thinkstock

Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash-method records. However, if an inventory is necessary to account for income, an accrual accounting method for sales and purchases is often required.

Certain businesses prefer one accounting method over the other depending on the following factors:

• Business size: Smaller businesses, such as sole proprietorships and partnerships, often prefer cash accounting because it’s simpler and requires less bookkeeping. Businesses switch to accrual accounting as they grow in order to more accurately reflect revenue and expenses.

• Tax deductions: Depending on the type of business, cash or accrual accounting may be more beneficial when filing taxes. If expenses are incurred in December 2013 but not paid until January 2014, the operation still can claim a tax deduction for 2013—if it uses the accural method. The business would not be able to claim deductions until the 2014 tax year if cash accounting were used.

• Internal accounting: Although the IRS allows a different method for internal accounting and tax accounting, using the same accounting method for both purposes is a good practice because it simplifies the accounting process when calculating income and expenses.

Ideally, the owners and operators of every pet products business should opt for an accounting method that shows their operation’s real-time financial health. Unfortunately, until now, the complexity of the accrual accounting method has dissuaded many smaller businesses from adopting it. The good news is that most accounting software packages simplify the process of accrual accounting. Naturally, always solicit the advice of a professional familiar with the pet products business. <HOME>


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