We are all in business to make money right? But we are not in the business of paying Uncle Sam. We want to keep as much of our money as we possibly can, especially from him.
So as a small business owner, what do you do? You learn the difference between cash basis and accrual basis and how each one affects your income taxes.
Cash basis means that you recognize income when you actually receive it and deduct expenses when they are actually paid. When money actually exchanges hands. Most business owners follow this accounting method because they do not want to pay taxes on income they have not yet received – the Accounts Receivables. On the flipside, they don’t get to deduct the expenses incurred that they have not yet paid – the Accounts Payable. This is the best method of accounting for tax purposes, unless you brought in a boat load of money. However, this method does not tell you the true financial position of your company. Your business could be profitable and you not know it because you financials will be missing key transactions.
Accrual basis means that you recognize income when you have earned it and deduct expenses when they have been incurred. This means you do recognize the monies in your Accounts Receivable and Accounts Payable. Accrual is the required accounting method based on the Generally Accepted Accounting Principles (GAAP) for financial statement purposes. They tell you the true picture of how financially healthy your business really is. If your business is not profitable, you will be able to see why so that you can develop the strategy needed to turn things around.
Learn the difference between these two methods because can make all the difference.
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