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.
When you use the cash method for accounting records, you will record income and expenses as it is transferred from your accounts in real time – instead of writing down when you made the commitment to spend money, you write down when it actually left your hands. Also, you write down when you actually received money, instead of when you intended to take money in. This makes it possible to delay billing and expedite payments so you do not have to pay income taxes on some of it until the next business year.
There is a lot to like about the cash method; for starters, it is a lot easier to figure out than accrual, get it. At the same time, cash methods can mislead people as to how the business is run, since it is entirely dependent on when you say you get payments and when you send them. With the accrual method, you work hard to show expenses and income when they are applied.
The main drawback to the accrual technique is the fact you may be taxed on income before you actually have the money, although this technique offers a far more accurate image of your businesses financial performance over the long term in comparison to the cash technique. Expenses are recorded when they are sustained and revenue is recorded as it is made, rather than when money is handed over.
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