Whether you are a physical or digital business, accounting is necessary; it is in analogy similar to the heart of an organism. From payroll taxes to sales tax and income tax; it is essential the documentation is in order. And such documentation will allow you to gauge your organization’s standing at all times and assist in reporting and paying the appropriate amounts of various taxes. Accounting allows for the receiving of revenue, paying of debts and the balancing of books. When done right, it will accurately predict your businesses’ financial position and be able to assist on future profit projections for your company.

Knowing your accounting methods is simply being able to distinguish between the two kinds that are frequently utilized. And what are these two methods? Well, the two standard methods of accounting are the accrual and cash method. How do they differ? Simple, the accrual method of accounting requires you to record all income as soon as a sale is made; regardless of whether or not payment was received. Likewise, it requires you to every expense when incurred regardless of when the expenses are actually paid. The IRS promotes the accrual method because it more accurately matches income with expenses.

The second type of accounting method is the cash method. Unlike the accrual method, with the cash method, transactions are only recorded when money is paid or received and expenses are recorded when actually paid. The cash method is not recommended in business settings as it may misrepresent the finances of a small business. As an example, a company that was paid by all its customers, and is yet to pay its debts, will be construed as having more than it does (when in reality it is not the case). By the same token, if a company paid its debts, and is yet to receive payment from its customers; the books would show negative.

While the accrual method may be more accurate, the cash method is much easier for the lay person to understand and accomplish. For this reason, the Internal Revenue Service allows most small businesses to use the cash method of accounting. By knowing your accounting methods, you know exactly what to look for in an accountant. You are able to come together and make financial decisions that affect your business as a whole, e.g., whether or not to use an accounting program like QuickBooks or Peachtree. Although the issue of manual versus electronic accounting still presents itself every now and then, electronic record keeping beats manual record keeping in efficiency and speed. In general, know and comprehend the methods you use in accounting.

As we all know, doing too many things at once reduces the effectiveness of such an outcome, which is why you need a highly skilled CPA with a track record of helping business owners improve their businesses. Certified Public Accountants and Certified QuickBooks Pro Advisors are the preferred choices to provide first rate support on your accounting needs. These professionals will take care of your accounting needs, while you take care of business needs.

Author Bio: Learn more about accounting methods at Desert Rose Tax & Accounting. Joseph Rose is a CPA in Tucson, Arizona. Mr. Rose is the president and founder of Desert Rose Tax & Accounting which specializes in small business accounting and taxes.

Category: Business
Keywords: accrual,cash,tax accounting,accounting tax,small business