The Tax Cuts and Jobs Act of 2017 has led to changes in the way companies choose to be taxed. Prior to the tax reform, many businesses were required to use the accrual method of accounting. But with the change in tax law, businesses with $25 million or less in annual revenue over the prior three years can use the cash method. More businesses are choosing the cash method of accounting instead of the previous accrual method, but what is the difference between cash and accrual methods of accounting?
Every business must make a decision on how and when to record income and expenses. Making the choice between the cash and accrual methods is about the timing of when revenue and expenses are recognized and reported. On their most basic levels, cash accounting is a recording of the transaction when the money actually changes hands, while in accrual accounting the transaction is recorded when it is earned or established. Cash is immediate and accrual is anticipated.
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