"Cash" vs "Accrual" Basis?

Most business report income and expenses on one of two different tax basis systems: Under the CASH method, you report income when received, and expenses when paid. Under the ACCRUAL method, you report income when earned, and expenses when you incur the obligation to pay them.

Even under the Cash method, you generally cannot write off goods or supplies purchased for resale until you actually sell the items. The difference is maintained in "Inventory" which is an asset of the business.

Most sole proprietorship sales or service businesses use the CASH basis, since it is the easiest to deal with, and you do not fall into the situation of paying tax on income you haven't as yet collected. However, if you are engaged in manufacturing products for resale, or if income would be materially distorted if you report on the cash basis, the Internal Revenue Service may require that you use the accrual basis. Professional guidance would be a good idea.

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