Accrual Basis vs. Cash Basis

Q: I own a small business. How do I know if the Accrual Basis or the Cash Basis is right for me?

A: The simplest rule of thumb in determining which accounting method is better for your business (assuming minimizing taxes is your primary goal), is:

• If at the end of the year, your A/R (Accounts Receivable) is typically higher than your A/P (Accounts Payable), the Cash-Basis method would be your best bet in order to minimize taxes.
  
• If at the end of the year, your A/P is typically higher than your A/R, the Accrual-Basis method would be your best bet in order to minimize taxes.

Of course, this is just a generalization. Other factors such as Inventory may play a role in the final decision. Consult with your CPA before making a final decision, but just keep the above facts in mind as your general guideline.


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