What are the advantages of cash basis accounting over accrual based accounting?
A. Generally speaking accrual based accounting is a more accurate measure of the performance of your business, however for tax purposes, cash basis will often result in a lower net income and accordingly less taxes. Please note that the IRS requires all businesses that have inventory to use the accrual method and that you are not allowed to arbitrarily switch back and forth. Furthermore in cases were you are generally paid up front such as in the snow plowing business the accrual method would produce lower taxes. Finally contractors are generally required to use a variation of the accrual method called the completed contract method. Be sure to talk to your accountant or tax preparer to make sure that you are using the method which is best for your business. Q.
