Converting from Cash Basis Accounting to Accrual Basis Accounting

Sometimes businesses want to know how to convert from cash basis accounting to accrual basis accounting so they get more useful accounting information. Other times, as a result of tax laws, businesses may be required to figure out how to convert from cash basis accounting to accrual basis accounting.

Converting from cash basis accounting to accrual basis accounting doesn't have to be difficult, but there are five factors you want to consider:

  1. You can use a different accounting method for external, or financial, accounting than you use for tax accounting. This means that you'll need to decide, when you talk about converting, whether you're converting your financial accounting or your tax accounting or both accounting systems from cash basis to accrual basis accounting.
  2. Accrual basis accounting works slightly different for financial accounting purposes than it does for tax accounting purposes.
  3. Accrual basis accounting requires more accounting and bookkeeping time and expertise, so you'll want to plan for these increases.
  4. If you can, you probably want to use cash basis accounting for your tax accounting. Cash basis "tax" accounting often lets you defer income taxes.
  5. If you want to change your tax accounting method, you need to formally ask the Internal Revenue Service for permission. (This permission will, as a practical matter, always be granted if you're converting from cash basis accounting to accrual basis accounting.)

If you have questions about how to convert from cash basis accounting to accrual basis accounting and want assistance, please call me at 425-885-9499 or email me at steve at stephenlnelson dot com to make an appointment.

Related Topics:

Tools for Saving Taxes

One of the most powerful tactics for saving small business taxes is maximizing your deductions. You can literally save thousands in taxes each year.

Read More

Using an S corp for your real estate investing? To maximize savings, you need to minimize the salary paid to shareholders. But this decision is tricky.

Read More

Tax laws provide active real estate investors with giant tax planning loopholes. A little upfront planning on your part could save you thousands a year...

Read More