Understanding the Accrual Method for Sales Tax
Cash basis versus accrual basis is one of the most confusing concepts for many business owners. Generally speaking, you can choose which you’d like to use for tax purposes, but sales tax can get tricky since it’s on a state-by-state basis, and in NJ, the accrual method of accounting must be used for sales tax records. So what does that mean?
Accrual accounting means revenue and expenses are recognized and recorded when they occur, as opposed to cash basis accounting which means it's not revenue or an expense until cash exchanges hands. Under the accrual method, all items of income are included in the gross receipts when they are earned, although actual payment may not be received until later.
Before your head starts spinning, for many businesses, cash and accrual methods for sales are the same. For example, if you don’t make a sale until you exchange cash (like a retail or online store), your accrual and cash basis sales are the same, so this point is moot for you). But for a business where you make a sale and deliver on it in January but don’t get paid until April, the income (for sales tax purposes) is considered income in January when you earned it. Assuming you’re on a quarterly remittance schedule for sales tax (most common, especially for new business owners), that means the sales tax for that sale would be due with your Q1 2022 (Jan - Mar) sales tax payment, not in Q2 (Apr - June) when you actually received the money.
Accrual accounting paints a more accurate portrait of a company's health by including accounts payable and accounts receivable, but it does require stronger bookkeeping records than cash basis.
Let ASE Group take the guesswork out of your recordkeeping and sales tax responsibilities so you can focus on your business. Schedule a free 15 minute consultation today to discuss how our CPAs can help you #ASEYourBusiness!