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| Business Accounting - The Two Main Accounting Methods |
| Written by Mark Walters |
| Thursday, 15 July 2010 08:18 |
|
When referring to accounting methods, we are talking about the ways in which financial records are kept by businesses, which are used to make their financial reports for each quarter. You can use both accrual and cash methods for keeping records of financial transactions for business. If you run a small business, it would help you to determine what method you want to take advantage of, factoring in sales volumes, the presence of customer credit, and IRS tax requirements.
When referring to accounting methods, we are talking about the ways in which financial records are kept by businesses, which are used to make their financial reports for each quarter. You can use both accrual and cash methods for keeping records of financial transactions for business. If you run a small business, it would help you to determine what method you want to take advantage of, factoring in sales volumes, the presence of customer credit, and IRS tax requirements. In order to stay abreast of tax laws, you have to keep records of your finances. Also, managers can use this information to learn how the company is doing money-wise, which will help them make decisions on its future. While you can switch up accounting methods down the road, it helps things along much better if you pick the right one from the beginning and stick with it, so weigh your options carefully. 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. There is a lot to like about the cash method; for starters, it is a lot easier to figure out than accrual, and it will tell you a lot more about how your cash flow is doing. What's more, you do not have to get taxed on the money you bring in until you actually 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. With the accrual basis of accounting. you record income and payments when you actually earn them, instead of when you choose to pay them. With the accrual method, you will have a much better notion of how you are doing financially in the long term. However, it is far more complicated to figure out and record, and you might have to pay income taxes on the money you bring in before you actually get it, which can be unfortunate to go through. |