Liquor store owners may have the option for reporting income and expenses to the IRS either under a cash or accrual accounting method. The two methods can reveal completely different pictures of a store’s finances despite recording a nearly identical transaction history. Under cash accounting methods, small business owners may even be able to significantly reduce their tax burden by making their profits appear far less than they actually are. But cash accounting methods are not available to every business owner. For instance, several liquor store locations owned under an incorporated holding company may not be eligible since their profits will exceed the IRS’s “Sales Test” threshold. Package stores that intend to grow significantly or to apply for a liquor store business loan may also want to pre-emptively select accrual accounting instead. Making the switch from cash accounting to accrual accounting can be expensive, so liquor store owners should anticipate their business goals and growth trajectory before deciding which method to use. Nevertheless, cash accounting can offer some pretty handy benefits when managing your balance sheets — especially around tax time. Learn about the difference between the two accounting methods and why you might choose one or the other by reading on.
Cash accounting methods record payments and expenses at the moment the transaction takes place. If you pay cash for $10,000 worth of alcohol inventory, then that payment is recorded immediately. But if you purchase the $10,000 of inventory on credit, then the payment is not recorded because no money has left the business’s account yet. Similarly, if you receive a check for a $2,000 purchase order, then that payment amount is registered on your accounts the moment the check is deposited. But if the customer says, “I’ll owe you,” the payment isn’t recorded until it’s actually received.
In many ways, cash accounting is the simplest method for non-business owners to approach their accounts. The typical person looks at their checking account on a cash basis, for instance. By recording money transfers only when they happen, looking at your accounts books gives you an instant idea of how much liquid cash you have on hand. You also gain the ability to control exactly how much income you supposedly have earned for your business. Say that you have a million dollars in profits in December, and you’re worried about paying taxes on all that. Under cash accounting, you can pay off debts or obligations in advance, reducing the amount of cash you have in your books. For example, you could pay in advance for a $600,000 liquor store renovation, reducing your final profits to $400,000. This capability reveals how cash accounting can enable business owners to quickly adjust their final earnings statements at will.
For all its benefits, the cash accounting method has some serious limitations. The biggest one is that the IRS forces businesses that earn $5 million in annual sales over an average of three years to use non-cash-based methodology instead. Most businesses that purchase inventory will surpass this threshold, especially if they are in a large market. Secondly, cash accounting can distort your business’s actual financial health. Under cash accounting, you can make a huge purchase on credit and make your business appear as if it has extra money in the bank. Think of it as similar to having $900 “extra” dollars in your personal account just because your rent isn’t due until next week. Also, if you pay off debts all at once under a cash basis — such as prepaying your business rent for a year — your business must then avoid declaring rental expenses for the next year since they have already been paid. Accrual accounting therefore gives business owners and financial institutions a clearer indication of the business’s transaction history, debts, and overall financial health. The drawbacks of accrual accounting are that owners have less control over their profit/loss statements and that they must use a separate calculation to determine current cash on hand.
Often, lenders prefer to have a business’s account statements declared in accrual form so that they have an accurate picture of cash flow and overall debts. ARF Financial can help owners secure low interest loans for liquor stores with minimal documentation and no collateral after analyzing your specific business challenges and opportunities. Get a free, no-obligation quote in just a few days when you apply now. Click here to get started, and we can provide you with options for your own financing or loans in as little as 48 hours.