Question

there are two different types of accounting methods for tax filing (Cash and Accrual). What are the differences between the two? Which would you prefer based on how beneficial it would be to your tax filing (imagine you own your own business for this discussion)? How could they benefit your business?

Answer 1

Cash and Accrual basis of accounting:

Cash basis of accounting records only cash transactions; whereas accrual basis of accounting records credit transactions.

In Cash basis of accounting, revenue is recognized when cash is received and expenses are recorded when cash is paid; Whereas, On accrual basis of accounting, revenues are recognized when earned and expenses are recognized when incurred.

The cash basis of accounting is better for small businesses. Whereas, the accrual basis of accounting is better for large businesses.

For taxation purpose, many businesses choose cash basis reporting, even if they use the accrual accounting method that is most appropriate for your business.