- Cash-Basis Accounting.
- For simplicity, most small businesses account using the cash-basis method, recording income when it is received and expenses when they are paid. For businesses that generally do not require significant inventory or assets, a single-entry accounting system may suffice. Activity is recorded on the income statement, with little attention paid to the effect on the balance sheet. Records can be kept in a computerized spreadsheet, and then given to a tax preparer to make adjustments for non-deductible items to arrive at taxable income.
- Accrual Accounting.
- In some instances, a small business may benefit from the accrual method of accounting, which records income when earned and expenses when incurred, giving rise to the need for a double-entry accounting system to record accounts receivable and accounts payable.
- Bookkeeping Software.
- Accounting software programs, such as Quickbooks Online, are helpful in recording double-entry accounting, which tracks the impact of the balance sheet accounts. For example, if you receive a $5,000 fee for services rendered, you would book that as Revenue, which would automatically increase the assets in your Operating Account. Similarly, if you expended $1,000 in expenses, this would decrease your assets. The balance of $4,000 in the operating account would constitute your equity in the firm. If you borrowed $500 from a bank to open the business, you would not book this as Revenue, but rather as an Asset and Liability, with no effect on equity.
Tax Tip – A taxpayer man not delay the recording of income that has been constructively received, by placing money for services rendered into a non-business holding account.
Tax Tip – A taxpayer who receives an advance payment for services under a contract, may elect to postpone the unearned portion provided the services are to be performed by the end of the next year.
ASSETS – LIABILITIES = OWNERS EQUITY
- Loans In
- Bank Account
- Accounts Receivable
- Loans Due
- Accounts Payable
- Capital Account