One of the decisions each employer must make is whether to keep the books on the cash basis or accrual basis.

Accountants almost always tell you the accrual method is preferable. While it seems that accountants sometimes make things more difficult just because they can, in this case there is actually a good reason for the recommendation of accrual basis accounting over cash basis.

If your objective is just to keep your checkbook balanced, then the cash basis method will be adequate. If you only provide one or two services or a handful of products, your needs are going to be different from a business with a more complex business structure. Or perhaps you are just starting out; you are building your infrastructure and don’t have many sales yet, just expenses. In that case, cash accounting is likely exactly what you need.

It can be relatively simple to convert from cash basis to accrual basis accounting. You may have to pay an accountant to do it, but once your business is up and running, you should be able to afford it. Also, do not want to learn the accrual yourself, right?

Another method of handling this would be to operate under a cash basis sole proprietorship, partnership, LLC pass-through, or passing through the S-Corp. By “pass-through”, I mean structuring the business so that the net income or loss flows through to your individual tax return, just as it does with a sole proprietorship. Use this entity for the research and startup phase, and then once you are ready for business, start an accrual basis LLC or corporation.

It is a good option to consider with your attorney and tax professional, especially if the idea of making one of these conversions cash accrual makes you dizzy.

As mentioned above, the cash basis helps keep your checkbook up to date, and for many business owners, that is enough. You may be wondering, why would anyone want to depart from such a simple approach?

Here is the truth of the matter: accrual basis accounting is one of the great contributions of the accounting profession. For many kinds of operations, the accrual basis of accounting is the only way to determine whether you are profitable or not.

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