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One of the first ideas is to keep the business records and resources separate from personal resources. Use a different bank account, credit card, etc. This gives a better picture of the business, and lets you deduct credit card and bank expenses. If you take money out of the till for your personal use, record it as personal use.


Accrual and Cash basis accounting.

Cash basis recognizes income when received and expenses when paid.

Accrual basis recognizes income when earned and expenses when incurred.

These are the two most popular methods of accounting, although there are some hybrid methods as well. Cash basis is the method used by people in the day to day world. Money claimed when it is received. If you work today, but get paid in two weeks, then you have received (and have) no money. With accrual income is recognized the moment it is earned, even if a client is not going to pay you for weeks. Expenses are also handled differently. Using the cash basis, we do not recognize an expense until we pay for it. For instance, if rent is due on the first of the month and today is the third and we have not paid it, then we have not incurred the expense. Using accrual basis, we have an expense the moment it is incurred. Therefore, the rent expense is recognized on the first, even though the check has not yet been written for it.

While cash seems the easiest way to keep your records, it is not nearly as accurate. For example, if you collect a lot of money, fail to pay your bills, you will look like you are rich. Nothing reflects the expenses incurred in order to make that money. The phone bill, the rent, the electricity are all legitimate costs incurred in order to make the income.

Accounting is built on principles governing the proper way to allocate income and expenses. One of the foundational principles is called the Matching Principle. This says that you should match income with the expenses incurred in the same time period. This is why accrual is a better way to accurately assess your situation. If inventory is a big part of your business, then the IRS states that you must use the accrual method of accounting.


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Last Update: 09-15-2008     Copyright© 2005-2008 Above -N- Beyond Business Services