What is the Cash Method of Accounting?
Under the cash method of accounting, income is generally recorded when you actually receive it, and expenses are generally recorded when you actually pay them.
However, there are exceptions:
- Under the doctrine of constructive receipt, you must record income when it is made available to you for your use.
Example: A customer pays you on December 30, 2016 for services you performed, but you don't deposit the check until January 2, 2017. You must record the payment as 2016 income. You can't defer it until 2017 just because you deposited the check in 2017.
- Similarly, if you prepay certain expenses more than 30 days in advance, you can't deduct the entire expense right away.
Example: On July 1, 2016 you pay for a two-year subscription to a trade journal. You can deduct 1/4 of the payment in 2016, 1/2 in 2017, and 1/4 in 2018. You can't deduct the entire amount in 2016.
Many businesses without inventories use the cash method because it is fairly simple. Farming businesses with gross receipts of $25 million or less, qualified personal service corporations, and entities with average annual gross receipts of $10 million or less, may use the cash method.