The accrual method of accounting is used by most corporations, companies that make over $5 million in revenue per year, and those with physical inventory. It can also be ideal for businesses that sell items on credit, when payment doesn’t arrive until after the sale is made. If your company uses this method, it will acknowledge payment when a product is purchased even if no money changes hands. A tax accountant in Las Vegas can help you understand the concepts behind this accounting method.
Businesses May Pay Taxes Before Receiving Revenue
Since the money from a sale is recorded when the sale is made as opposed to when the money is received, it may be necessary to pay taxes on money before getting paid. If your company chooses this accounting method, an accountant may be able to help you find ways to reduce your taxable income or obtain short-term financing to pay the government.
Expenses Are Also Recorded As They Occur
Companies that use the accrual method must record the expense when it occurs. This can mean that a company cannot accelerate future costs to the current tax year to obtain a tax advantage. On the other hand, your company may be allowed to buy on credit or pay employees days or weeks after performing services, so it may be possible to deduct an expense before the bill is actually paid.
You Must Generally Stick to One Accounting Method
Once your company has determined its accounting method, it must generally stick to it. However, it is possible to ask the IRS for a change from accrual to the cash method or another accounting strategy using Form 3115. In some cases, the government will use a different method if it believes that your current tactics don't accurately reflect your company's income and expenses.