Explore your bookkeeping options.

You're the expert at what you do and probably not in bookkeeping, so you may not understand the different bookkeeping methods available to you. Ignorance is often bliss, but it is important that your finances are managed in the way that is most helpful to your business.

The differences between the two main bookkeeping methods (cash and accrual) boil down to when and how transactions are recorded in your books.

The Cash Basis

With this method, income and expenses are recorded when payment physically changes hands.

[For example: You're a photographer and shoot a mini-maternity session in August. The glowing mother-to-be pays you when she receives the finished images in September. If keeping your financial records in the cash basis, you would record this sale in September, or when you physically received the payment.]

The cash basis is the most straightforward method, and is therefore very popular among creative businesses.

The Accrual Basis

In the accrual basis, income and expenses are recorded on the date the actual event takes place, whether or not money has been exchanged yet.

[If using the example above, you'd instead record the sale in August in the form of an invoice. This invoice would hang out as an Accounts Receivable on your books until your client pays it. Once you receive payment, your books would reflect the increased cash in your bank account, and the A/R would be cleared.]

This method offers a clearer picture of your finances since it tracks when your business is physically encountering expenses and earning revenue.

Which method should you use?

The accrual basis will usually be my recommendation. Yes, the cash basis is simpler and may be the better choice in some instances. The accrual method, however, provides more detailed information which is necessary for accurate budgeting, cash flow forecasting, and tracking who you owe, and more importantly, who owes you!

Basically, the accrual bookkeeping method helps you keep your business running smoothly. It also allows your bookkeeper or accountant to analyze your financial health to give you a helpful, proactive edge over your competition.

It's important to note that you can keep your bookkeeping records in the accrual basis, yet file your taxes in the cash basis. Many tax preparers recommend this option so that you don't pay taxes on monies you haven't physically received yet.

Questions or comments? Put me to work! Contact me any time.

[DISPLAY_ULTIMATE_SOCIAL_ICONS]