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Discussion in 'Business Operations' started by jrblawncare, Dec 30, 2001.
Bruce & others Thanks,this is what makes this site so great....Kelly D welcome....I guess I'am on accrual and will stay that way,December is not a big month anyway,just want to keep the numbers right for my CPA,this is the end of year two for the business and I still have so much to learn about the money end of things and just running a business.
kelly, i see my friends above ( lonestar, bruces, ric.) got that one straightend out before i got back. that said welcome to lawnsite. this is the place were pros of all experiance levels bring there knowledge to share with one another. that being said we hope that as you move forward with your biz. you will share your experiances with us so that we too will learn from you...
If you are on an accrual basis and calender year, an invoice dated in December is income for 2001. If dated Jan 1, 2002 it will be income for 2002 even though the work was performed in 2001. On the flip side, by working on the accrual basis your expenses are on the books the day they occur, not the day the money is dispersed. This can be an advantage if you need to move income (to 2002) or buy something for tax advantage (2001) because maybe you had an abnormally fat year in 2001 and 2002 could be soft for many reasons. In accrual the money is counted when the transaction occurs, not when money actually changes hands.
If you report on a cash basis (when the money is actually dispersed and received) your flexibilty is limited.
I am on a cash basis because it is easier to make only one transaction in QB whereas accrual requires two transactions. 1. when you buy and one when you pay. However ( Bruce correct Me if I am Wrong) I believe Accrual Basis will give you a better finical picture because it is more up to date with Current info. As Harold has pointed out there are tax advanages to cash accounting at year end. Cash basis will level out over time however it does not give as good of a current picture. If you do the same volume of business each year then cash will be the same as accrual. But since no business does the same each year. Cash basis is not a true pictrue unless you pay and collect on the day of service and purchase.
Good luck on going part time--full time after tax season. I am sure you will be full time tax man each year. This should work out because tax time and grass time are different. When I first retired from the farm I had a horse and carriage business in winter tourist season and Cut grass in grass season. Your accounting back ground will give you a heck of an advantage that I and others members of LS don't have. My advise to you is start working on apply and irrigation licenses now as well as landscape knownage. You will want and need these as the busi grows. Good luck from all the members of LS. I am sure we all will be willing to help in any way we can.
You are right regarding accrual basis giving a truer picture of the business financial picture. Cash basis can be a great advantage in the first year if you have a significant amount of uncollected receivables at the end of the year and fewer unpaid bills than receivables.
After the first year if things stay at about the same level, the difference between cash and accrual is minimal. In other words, if the accounts receivable at the end of each year and the accounts payable at the end of each year stay about the same, accrual and cash will be about the same.
If the business is growing and receivables are higher in the second year, then you are probably going to show less income on the cash basis (assuming paybales are about the same). While the business is on a growth pattern as far as receivables increasing, cash basis will generally result in a lower income for tax purposes.
Again, as previously discussed, a lot of companies keep their books on accrual basis put prepare their tax returns on the cash basis. This is a very simple conversion for your tax preparer to make (if you are using Quickbooks you can even show your financial statements on either basis by checking an option). Doing this really gives you the best of both worlds, a true picture of your business operations and minimzing your tax bill.
Once you start filing your tax returns on one basis or the other, you will have to stay on that basis unless you receive IRS permission to change. That is possible, but a somewhat involved process.
Another thing, if you are on cash basis, you will at some point have to catch up for any imcome you have deferred by using cash basis. If you go out of business at the end of a year and still have 50,000 of receivables on the books, you will be paying tax on them as you collect.
As far as my situation, I took the Missouri applicator's test and just received my passing results. I am in the process of completing the paperwork to obtain my license so that I can offer applications.
Just got done writing check for 4th quarter sales tax collections; will post today so it is in 2001 - therefore all 2001 sales taxes collected are paid in 2001. When I had employees, also did 941, state employee, state & fed unempl on Dec 30 or 31. Any other open accounts will be paid before end of Dec. If some vendors wish my Dec payment to be 2002 income to them, I just mail their checks on Dec 31. So later I can easily track all 2001 expenses, because they all show in calendar year; the only items unpaid may be some credit card charges, which (I hope I'm right, bruces) are deductable in the year charged, not the year paid. If you do this, be sure to do it every year to keep up simplicity.
All December work billed later this week will be coded in billing software as 2001 work, and Dec 2000 work billed in Jan 2001 was also coded as 2000 work. May even have some minor items I will not bill until work starts on property in Apr 2002; when billed these will be coded as 2001. So I can easily pull out all the year's actual billed work for any year.
You are right on the money. This makes both methods the same as you have no unpaid bills. Only exception is that the December billings uncollected would still create some variance.
You are right about the credit cards, they are deductible when charged rather than when the charge is paid.
Thanks Guys! One of the better Elements of Biz posts I've read.
How can a charge on a credit card, using cash accounting, be counted when it is charged? No funds have been dispersed. No cash has moved. You've only created a liability just as if a vendor gave you credit on his own.
Charged slips only count if you are on accrual basis.
I'm missing how invoices made in the new year can be counted in the previous year on any accounting basis.