What is involved in transitioning a company from cash basis accounting to accrual basis?
Jamin, You need to file Form 3115 when changing methods of accounting. And yes, millions of small businesses are on cash basis, especially service types of retailing. Most individuals and many smaller businesses use the cash method of accounting. Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. Changing accounting methods requires formal approval of the IRS, but new guidelines adopted in 1997 make the procedure much easier for businesses. A company wanting to make a change must file Form 3115 in duplicate and pay a fee. A copy should be attached to the taxpayer’s income tax return and the other copy must be sent to the IRS Commissioners. * If the total amount of the change is less than $25,000, the business can elect to make the entire adjustment during the year of change. * Otherwise, the IRS permits the adjustment to be spread out over four tax years. To help you on methods of accoun
