Small business/self employed US taxes question

Hello everyone,
I haven't posted in a long time, but I just started up my own business in 2010 and now I am of course needed to file my US taxes (living in the UK permenatly). We have filed them a few times now on our own and are fine with most of it, but I am trying to fill out my Schedule C "profit or loss from business" form at the moment. I am stuck right off the bat and the instructions are just all jumbled up words mostly to me!
My business is cake decorating, which I run out of my home. For my accounting system (if you want to call it that), I basically have a spread sheet which my husband set up for me, and on it is listed all of my incomings and outgoings and if they were an expense, etc...
What type of accounting method would you call this? The 3 choices on the form are Cash, Accrual, and Other.... I would tend to say that that is a Cash method, but I don't really know about this stuff. From what I can understand of the instructions, I would need to use an accrual system and take inventory of my "stocks", which I am assuming would be the flour, sugar and such I use for my cakes, and deduct that from the expenses and such....
I have all these questions and I have only just gotten into it! Can anyone help please?
Thanks!
Rachael =0)
www.cakesbyrach.biz
www.facebook.com/cakesbyrach

As a general rule, business that have inventory must use the accrual method. However, the IRS allows certain small service businesses that also sell related products to use the cash method of accounting. The cash method can be used if small business meets certain requirements and has gross receipts for the previous 3 years below $10 mln.
Assuming you meet the gross income test of $10 mln and considering the type of business activity you provide (cake decorating), your business meets one of the exceptions and can use cash method of accounting.
Your qualifying exceptions is: Principal business activity is the fabrication of tangible personal property in accordance with customer design or specifications.

Best of luck,
www.taxesforexpats.com
http://twitter.com/taxesforexpats

Although the US tax system does indeed allow you a choice of cash or accruals method in practice this should not make a pennies worth of difference to your US tax as your income will be covered by the foreign earned income exclusion.

The only time I can think it might make a difference would be if you had children and were claiming the refundable child credit (along with foreign tax credits) instead of the exclusion.

Some handy hints...while I think of them...
1. The UK has a mandatory accruals method so you may well want to use the same accounting method and year-end for both fiscal authorities to simplify your life.
2. You have hopefully notified HMRC of chargeability and registered to pay Class 2 NIC to avoid the horrid penalties that can be charged if they are simply told a little late.
3. You have also hopefully requested a certificate of coverage to send to the IRS to claim exemption from US self-employment taxes.