About accounting methods

Businesses must determine how they are going to record income and expenses. Accounting supports the two most common methods: accrual and cash-basis.

Accrual accounting

With the accrual method, income and expenses are recorded when they are earned or incurred, regardless of when payment is actually received or sent. With some exceptions, the IRS advises that businesses that sell inventory use the accrual method.

Accrual accounting provides the truest picture of how your business is doing, because it includes booked sales and purchases (accounts receivable and accounts payable). Your accountant may require financial statements that are based on generally accepted accounting principles (GAAP). Only accrual statements meet GAAP requirements.

Cash-basis accounting

With cash-basis accounting, income is recorded when cash is received from customers and expenses are recorded when cash is paid out, regardless of when sales or purchases are invoiced.

Note: Ask your accountant which accounting method is best for your business.