Small businesses typically fall into two different accounting methods: cash and accrual. Both accounting methods refer to the basic rules and guidelines under which businesses keep their books and prepare their financial reports.
Depending on the legal form of the business, sales volume, extensions of credit to customers, inventory, and tax requirements set forth by the IRS, small business owners need to decide which accounting method to follow.
While some form of record-keeping is required by law, the resulting information can also be useful in assessing the financial health of a business. Although it is possible to change accounting methods down the line, the process can become complicated. That being said, it’s important for small business owners to consult with an accountant early on to decide which method is best suited for their particular situation.