Running a small business means you are handling multiple responsibilities. The product or service you sell is only one part of the equation – there is an accounting and finance component to running a business that can differentiate a successful business from a struggling business.
Accrual vs. Cash basis
There are two ways you (or your accountant) can choose to handle your accounting. First is cash basis. When you receive cash, or pay out cash, that influences your books and affects your tax liability. Accrual is very different. With accrual, you can have income on your books before you have actually been paid. This means you would be responsible for paying taxes on money that you may not have even received yet. On the flipside, expenses can be incurred before you actually pay them out – meaning you can reduce your tax liability before paying out.
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Many small businesses would be better off choosing a cash basis. If you're just starting out, you don't want to pay taxes on money you have yet to receive – cash is especially important to you at this stage. However, accrual gives a much better picture of what's going on with your company (imagine if shareholders found out about billion-dollar Boeing contracts only when Boeing received cash for them). Your accountant can help you pick the best method.