Create a New Company - Accounting Method

In Accrual accounting, revenue is recorded in your general ledger as you invoice customers, and expenses are recorded in your general ledger when you receive bills from vendors, regardless of when cash is actually exchanged. This presents a truer picture of income and expenses for your Income Statement/Profit and Loss Statement. Most companies use this method.

Businesses with inventory or that work on credit should use Accrual accounting. Some of the benefits are

• Better reporting: You get a truer picture of how your business is doing because it includes booked sales and purchases (Accounts Receivable and Accounts Payable). Income and expenses are recognized when they are earned or incurred, regardless of when they are received or paid.
• Tax benefits: Expenses are recognized in the year they are incurred not in the year they are paid. For instance, expenses incurred in 2016 can be used as deductions on your 2016 taxes even if you don't pay the bills until 2017.

You should use Accrual Accounting

• If you sell traditional inventory items (called “stock items” in Sage 50). This includes any merchandise you sell. The IRS requires this.
• You grant or receive credit from customers or vendors.

In Cash-Basis accounting, revenue is recorded in your general ledger when cash (checks, money orders, or currency) is received, and expenses are recorded in your general ledger when paid. However, unpaid credit sales and purchases do not show on ledgers, which can present a misleading picture of income and expenses.

If you use cash-basis accounting, you may discover that the inventory valuation report does not agree with the general ledger account for inventory. This is because inventory uses the accrual method, while the general ledger is cash basis. This means that the inventory records will be updated to reflect unpaid purchases and sales, while the general ledger will not be updated until actual money changes hands.

Many small, service-type businesses (accountants, lawyers, consultants) like cash-basis accounting. There are three main benefits to this method.

• Tax benefits: If income is not recognized until cash is received, you would have less income to report in a given year. Income not reported for December would be reported in January of the following year, resulting in a short-term benefit. Since most small service companies have more receivables than payables, cash basis may be the best bet.
• Less bookkeeping time/greater simplicity: In cash basis, you could choose not to record customer or vendor invoices or record less information for them since you have no receivables or payables accounts. On the other hand, if you don’t record invoices, you lose the benefits of aging and projecting cash flow.
• Easier cash management: Because revenue and expense are only recognized when cash changes hands, it is easier to obtain a truer picture of your cash position.