Accounting Methods Cash v. Accrual, which one is for your business?

Cash and accrual methods are the most commonly methods used by business taxpayers to report income and expenses. Once you have chosen your method, you must use it consistently.Cash Method:Due to its simplicity, the cash method is a popular choice for small businesses. To determine gross income, add up the cash, checks and fair market value of property and serviced you receive during the year.If you receive a check in 2010 but decide not to cash it until 2011, you must still count the check as income in the year you received it.Business expenses are usually deducted in the year they are paid. For example, if you order office supplies in October 2010, they arrive in December 2010 and you send a check to pay for them in January 2011, you should claim that expense deduction on your 2011 tax return. Accrual Method:With accrual method, income is reported in the year in which all events that fix the right to receive it have occurred, and the amount can be determined with reasonable accuracy, even if income was received in a different year. For example, this method calls for income to be reported when a service is performed. Also, you deduct business expenses in the year the liability arises, regardless of when they are paid.In the mentioned office supplies example, you would deduct the business expenses for supplies on your 2010 tax return. They were ordered and received in 2010 so you became liable for the expense then.Review Publication 538 for more details.