Cash vs. Accrual: Determine the Best Method for Your Small Business
As a small business owner in Dallas, you know that there is no one-size-fits-all approach to accounting that works 100% of the time. Depending on the size of your business, you can choose whether a cash or accrual system is better for you, and whether or not you want to adopt GAAP.
But how do you determine which one fits your business model? Here are 3 guidelines to consider when determining which practice is best for you:
- Consider Your Revenue Threshold
It may not be up to you – but rather the IRS – to determine which method is right for your business. Using the Test of Gross Receipts, the IRS determines if your income and assets are under the appropriate threshold to proceed with cash method accounting. In order to use the cash method, S Corporation business owners and sole proprietors must have less than $5 million in average annual sales in a 3-year period. Small businesses such as C Corporations and S Corporations must have less than $10 million in average annual sales in a 3-year period.
- With Growth Comes Accountability
As your business grows and outside investors become involved, your financial accountability grows as well. If your business has passed any of these milestones, then you are obligated to use accrual method accounting with GAAP:
- Third-party audits
- Investor board meetings
- Series A funding
- Initial public offering
- Evaluate Your Goals
While the cash method is a much simpler model for a budding small business, remember that it has its limitations. Because everything is actualized upon receipt, it is very hard to accurately forecast revenue and spending patterns moving forward. With the accrual method, projections lead to more sound budgeting, which leads to better spending choices and more opportunities to take advantage of business opportunities.
Need help evaluating which method to use for your Dallas small business accounting? NexGen Finance Solutions is a leading outsourced accounting firm in Dallas with years of expertise in all areas of finance. Give Bryan Polozola and his team a call today at 214-629-0100 or email bryan@nexgenfinance.com.
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