When starting a business, you have to determine the method you are going to use for accounting and paying taxes. The two broad choices are the cash method and the accrual method. You’ll find the good and the not so good of both aspects below.
If you are looking for simplicity, the cash method is probably your best accounting choice. Generally, income and deductions can be claimed when payment is actually received or made. This is best shown with an example.
I open a small business and have to order business cards and stationary. I receive the products and pay the invoice on November 18, 2019. Under the cash method, I can deduct the cost on my 2019 tax return.
Some businesses are restricted from using the cash method. These businesses may only use the cash method if they have less than a specific gross revenues for a particular year. Professional Service Corporations can use the cash method without limit. Tax shelters are prohibited from using the cash method.
The Accrual Method of accounting is a bit more complex. Under this method, the focus in on the date the expense is incurred, not paid. Although this may seem a small difference, it can play havoc with your books and piece of mind.
Using our previous example, assume I order business cards and stationary on the December 18, 2019. I receive the products on December 30th, but don’t pay the invoice until Jan 20, 2020. When can the expense be claimed? It depends on when economic performance occurred.
Generally, economic performance occurs when goods or services are provided to you. In the above example, economic performance would arguably occur when the business cards and stationary were delivered with the invoice on December 30th. Thus, I would be able to deduct the expense for the 2019 tax year.
As you can see, the cash method is the easier of the two accounting methods. To determine the best method for your business, speak with a tax professional.
If you need a Dublin based accountant to look after your accounting, bookkeeping, management accounts or other financial related business needs. Then click here now to call us here at Kilcoyne Accountants for a discussion regarding your requirements.