In businesses like the mattress or furniture industry as well as related professions like interior design, one of the main concerns regarding business management is keeping accounting records. Good accounting practices are important not only for tax purposes but also to enable the business owner to know just how much money is being spent and how much money is coming in. Without a good accounting method, any business is bound to fail. You can Go to FMD for accounting guide to learn about the accounting method. The accounting is done with the skills and expertise of the accountants. The reputation checking is necessary to have the desired results. The recording of the business is great with the correct method.
Smaller business owners may not always have the resources to maintain accounting staff on
a year-round basis. However, with a basic understanding of basic accounting methods and accurate record-keeping, you can keep your business books in good shape. In this article, we get you started on the right track by giving you an overview of two accounting methods that you can use. Each method has its own characteristics, and depending on your needs and how you run your business, one will be more suitable than the other.
You can choose from two types of accounting methods: cash-basis accounting and accrual accounting. A brief overview of each is given below.
Cash-basis Accounting
Companies using the cash-basis accounting method will only record expenses and earnings as they are spent or earned. For instance, if your mattress store will be cash-based, you will only count a customer purchase as a sale when you actually have the payment in your hands. The same principle applies to operational expenses and overhead. Even if you have fixed expenses like leases, the expense is only entered into the records once it has actually been paid out.
The cash-basis accounting method is more suitable for smaller businesses which have sole proprietors. This method is also simpler and less complicated, and does a pretty good job of keeping track of cash flow. However, it is rather limited in that expenses and revenues on a month-to-month basis may not always match, especially for transactions which use credit.
Accrual Accounting
Business corporations are legally mandated to use the accrual accounting method. While more complicated than cash-basis, accrual accounting does provide good month-to-month matching of expenses and revenues. This allows you to better see how much you are actually spending every month and how much money you have earned.
An accrual refers to a paper transaction where no money actually changes hands. Buying on credit or deferred payment is a good example of an accrued transaction.
How one method differs from the other?
Your choice of accounting method can make quite a difference in the way your business is run. Say that you are an interior designer managing your own company. If you finish a client project on December 2011 but the client only settles the bill on January 2012, then your accounting method will determine whether this transaction will be included in your 2011 or 2012 tax report.
Under the accrual accounting method, the transaction will be recorded for 2011, while the cash-basis method will file this for 2012. Depending on your net income for each year, one method over the other will affect your tax hit. If you are trying to reduce your net income for 2011, then it may be better to use the cash-basis method. Of course, incorporated companies do not really have this option and is only limited to accrual accounting.
