Accounting Methods: Cash Basis vs. Accrual vs. Hybrid
Which Method is Most Advantageous for Small Business?

Abstract
Many tax preparers fail to communicate to their small business owner clients about the types of accounting methods allowed by the Internal Revenue Service (IRS) and the advantages and disadvantages of each. The average small business owner simply trusts that the tax preparer is utilizing the method most advantageous to them. This paper explores cash basis, accrual, and hybrid accounting methods approved for tax purposes by the IRS. By comparing and contrasting the advantages and disadvantages of all of the methods, this paper will attempt to will seek to identify the method most advantageous to the small business
In cash basis accounting, its advantage of simplicity is also viewed as its major disadvantage. When a business grows larger and more complex, cash accounting will usually no longer suffice. One of the objectives in accounting is to match revenues and expenditures of a business as accurately as possible. This method makes no attempt to match the two which means that the income statement and the account balance(s) are not true reflections of recent business activities and market conditions. Businesses that are allowed to use the cash basis method of accounting should seriously consider using the accrual method. The reason to consider a different method is that the cash system causes the value of long term assets and liabilities to carry over without realizing the benefit to future terms using depreciation and amortization. This forces a business to keep separate ledger to track non-cash items such as fixed asset depreciation, receivables, and payables.
Perhaps the largest disadvantage to using the cash based method is that the purchase of inventory for the business is recorded immediately which may be long before a sale is made with the inventory to produce income. This, then, makes it very difficult for the business to determine if the sale was a profit or a loss.
The second method of accounting that is being analyzed is the accrual method of