Accrual vs Cash Basis Accounting
Two methods for timing when income and expenses are recognized: cash basis records transactions when money changes hands, accrual records them when economic activity occurs.
Detailed Explanation
Cash basis is simpler and used by most sole proprietors and small service businesses (under $30 million average gross receipts). Accrual basis is required for C corporations above the threshold, businesses with inventory in many cases, and most lenders/investors who want GAAP-conformant statements. The two methods can produce dramatically different reported income for the same business in any given year. Switching methods generally requires Form 3115, Application for Change in Accounting Method, and IRS approval.
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Learn about Bookkeeping ServicesRelated Terms
Bookkeeping
The systematic recording, classification, and reconciliation of a business's financial transactions to produce accurate financial statements.
Generally Accepted Accounting Principles (GAAP)
The standard set of accounting rules and guidelines used by US businesses for financial reporting, set by the Financial Accounting Standards Board (FASB).
Profit and Loss Statement (P&L / Income Statement)
A financial report summarizing revenue and expenses over a period of time (month, quarter, year) to show net profit or loss.
Balance Sheet
A point-in-time financial statement showing what a business owns (assets), what it owes (liabilities), and the residual claim of owners (equity), with the fundamental equation Assets = Liabilities + Equity.
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