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Home Business Accounting Basics for the New Entrepreneur

 

Home business accounting is necessary to help new entrepreneurs track expenses and sales, to determine the business profit. For those who are new to working at home, the concept of home business accounting can be a bit baffling. Two concepts to become aware of are cash basis accounting and accrual basis accounting.


Each method of accounting has differences which may impact the way a business is run. In understanding these concepts, a new business owner will better be able to handle the financial aspects of the business, saving time and frustration. After your business gets up and running successfully, passing off the accounting tasks to a professional will take the load off your shoulders. However, it will also provide an additional expense as you must pay for the work.


Accounting software such as Quickbooks allows entrepreneurs to switch between cash based and accrual based accounting methods.


Cash Basis Accounting


This method is used by most sole proprietors and businesses requiring no inventory. This method is simple because it tracks money as it moves in and out of the business, with transactions being recorded every time a payment is made, and every time a bill is paid. If you use this method of accounting and extend credit to your customers, you will need to wait until complete payment is made to record the payment in your ledger (thereby making for increasing confusion as the business grows and more people take advantage of the credit).

Accrual Basis Accounting

This method records transactions as they occur, instead of basing them on whether or not cash has changed hands. Sales on credit are recorded instantly, and expenses are recorded when the supplies or materials are ordered (rather than when money is received or paid out to cover the items). This method can be confusing, as recording bills when they are received rather than actually paid, may present issues in tracking what has actually been paid.


Which One to Use


Depending on the nature of your business, it may be easier to use one over the other. If you have a business with inventory, you are required to use Accrual Basis. Using Accrual Basis is also required if you have an annual sales volume of more than $5 million. If you allow your customers to use credit, using this method will require you to record the transaction as a sale before the payment is made from the credit card's issuing bank.


Many small businesses have tax benefits when using cash basis accounting, because expenses are tracked immediately. Using accrual basis accounting means businesses must pay taxes on revenue before they have received it. It is important to stick to a certain method once it is chosen. If there are any doubts about which method to use, speak to an accounting professional. While some accountants have one method they like to use over the other, it is important they know which one you want them to use; using the one they want may not be what is right for your business.

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