Doing bookkeeping for a small business can be very challenging. Many people think that they can do it on their own and then find that it is much more involved than they originally thought. One important thing that you need to do when you start out is to determine if you will use the accrual or cash method. Here are some things that you need to know about each type.
The cash method is one of the most common types of accounting for business that sell goods and products. How this works is that you count the money only as you receive, not necessarily when you earn it. This means that if you did some work for someone in June, but they didn't pay you until August, then the income would be counted in August. This means that you could a good deal of work in one month, and not report any money made that month, where another month you could do very little work and get paid a good amount. This is because you don't count the money as you earn it, but only when people pay it.
The accrual method is different than the case method in that you count the income when you earn it, even if the people don't pay. Take a dentist for example. They do a cleaning and dental exam in February, but the insurance company doesn't actually pay out until March. If the dentist is using the accrual method then he would consider the money made in February and on his books it will reflect that the money was counted in February, not March, even though the money was received in March.
Why Decide On The Method Early On?
It is vital that you decide what type of method you will use before you start bookkeeping. If not, you could easily create problems. For instance, if you are the dentist from our previous example, you might report that you made money for a cleaning exam in February, and then when the money came in, you report it again in March. This is why your books must have a method that shows both when you earned the money, and then when you received it.
Accounting can be very confusing and difficult for many small business owners, which is why hiring a professional accountant may be the best thing to ensure that your finances are done correctly.Share