The accounting method can be understood as the set of rules that every company has to follow when they report their revenues and expenses. Furthermore, in order to pay accurate taxes, you are again going to need accounting. 

You should know that if an audit is to be conducted for your company, the IRS is going to have a look at your expenses and all the other financial records. Thus, it becomes essential that you put everything in place, or it can create legal problems for you. 

As you might already be aware, all types of businesses need to keep records of their expenses and accounting. Accounting lets business owners keep track of their costs and finances. If your company does not account for this, you will not have an idea as to where your business is standing financially. 

Therefore, having a professional accountant becomes essential. You can get in touch with a Long Island CPA to manage your business activities more efficiently. 

What are the types of accounting methods?

Primarily, there are two types of accounting methods, namely accrual accounting and cash accounting. Companies usually use accrual accounting. On the other hand, cash accounting is used by individuals. 

When the revenues are paid and received through cash inflows and outflows, cash accounting is at work. When it comes to sales and purchases, and that too on credit, accrual accounting is what is made use of. Let us discuss the two types in a bit more detail:

Cash accounting:

Small business owners usually use cash accounting, which is simpler and more accessible than the other type. When the cash is either received or paid, that is the only time when transactions are recorded in cash accounting. 

To give another example, when you receive a payment, the sale is recorded, and when the bill is paid, the expense is recorded. When it comes to managing personal finances, you usually make use of cash accounting. Furthermore, it is only appropriate for a specific size of business. 

Accrual accounting:

You can say that accrual accounting is somewhat dependent on the matching principle. Revenue and expense recognition is where accrual accounting works. When you are able to match expenses and finances, you get a clearer picture of how the financial system is working and where you are financially. 

Usually, accrual accounting is used for large enterprises. To give you an example, a company might get a big project that may take a lot of time to complete, and the company may not receive full payment until they are completely done with the project they took. 

What do the types of accounting methods report?

As discussed earlier, accrual accounting is responsible for reporting all the expenses and revenues that have been earned through sales and purchases. When it comes to cash accounting, the costs paid through cash inflows and outflows are reported, both receivable and payable amounts. 

What can the IRS ask for when it comes to accounting methods?

The business should be making at least twenty-five million dollars or more than this. This has to have been there for at least the past three years in order to be able to use accrual accounting. For small business owners, the IRS permits them to use an accounting system that accurately reflects their financial income. 

They also have to be consistent with whatever type of accounting they are choosing, and they should not switch between the two frequently. Furthermore, a hybrid of the two methods can also be used, but not by individuals. 

Companies can make use of the hybrid of the two accounting methods. However, they will have to follow the rules of the International Revenue System(IRS). 

Keep track of your financial records to avoid audits!

If you want to keep your business free of audits conducted by the IRS, you need someone who can manage your account efficiently and keep everything in check. Get in touch with an accountant who can help you to manage things better in your business.