subject: Business Accounting Methods -Tips [print this page] The method that you use to maintain a thorough record of your finances for the purposes of keeping tabs on your cash flow and financial reports is known as your accounting method. When doing record keeping, you can either use the accrual basis or cash basis. Those of you who run a small business have to figure out the preferred method of bookkeeping you want to use in order to keep compliant with the IRS, among other things.
In order to stay compliant with the IRS and the law, you do have to keep records; additionally, these records will help managers figure out where the finances of their company are, and what they can do to make them better. You can alter your accounting methods at a later date if you wish, but it takes some time to do. It helps to pick the best one to use right away, depending on your needs.
Cash basis accounting records focus on how cash flows in real time, factoring in how income and expenses are calculated with that method. Once you physically get funds into your account, that is recorded as income, instead of just recording when you earned it. Expenses, on the other hand, are factored in when the money actually leaves your hands, instead of when they are 'spent'. With the help of this accounting method, you can delay billing if you like, so you can place it in the following year and hedge your bets with the IRS, or pay things earlier to avoid later trouble.
You can get a lot of benefits with the cash method; namely, compared to accrual method, it is a far easier to look at, it gives you a much better idea of how your finances are doing, and you do not have to get taxed on certain expenses till the following year. Due to the fact that you are altering the times at which you pay and take in money, though, you might tend to adjust details of how your company is doing financially, which can be misleading. What's more, accrual methods work harder to show when you actually spend and took in money.
With the accrual system, when you earn the revenue you record it, and when you spend money you record it. It does not matter when the money actually leaves your hands, just when you made the intention of spending or taking it in. While accrual methods give you a better idea of how your company acted in the financial year, and it gives you an idea of the bigger picture, it is a lot harder to figure out than cash methods, and you would have to pay income taxes on revenue before you even get it.
