Accounting Methods refers to the basic guidelines that businesses follow in order to maintain financial records and prepare their yearly business tax returns. Essentially, there are two types of accounting methods used: The Cash Basis Method and the Accrual Method.
Generally, most small business owners do not pay much attention to the methods of accounting used in their industry. However, as the sole business proprietor, it is essential to be able to differentiate the two methods, the eligibility of usage and consequences of using one method over the other. This decision must take into account the nature of your business and how you would like to maintain your financial records. Both methods have their advantages and disadvantages and necessary research must be conducted in order to make the right choice.
Most businesses are free to use Accrual accounting, but only businesses with less than $25 million in gross revenue in the last three tax years can use cash basis accounting to the IRS.
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