The cash method of accounting is a simpler way to perform bookkeeping. Because journal entries are only posted when cash is spent or received, there are fewer rules to follow compared to other accounting methods. It’s easier to report taxes, because all of the cash collected for the year represents your annual income. In general, fewer entries are required when using the cash method of accounting, so it works well for businesses looking for an easy way to perform bookkeeping. Another major advantage of this method is that you’re always aware of your cash balance. Accrual accounting methods require cash reconciliations, but under this method, you always know where you stand in terms of liquidity. A small business can opt for cash basis accounting as long as it meets a few requirements.
- Larger companies with public stock are required to use accrual accounting.
- If you require an inventory balance to account for your income, it is impossible to use the cash basis.
- A business must generally earn less than $1 million to be eligible for the cash method.
- The business must not constitute a tax shelter.
If your business meets these criteria, it can use the cash method for an easier approach to its finances.