Bookkeeping FAQs

Cash vs. Accrual

     Businesses are required to use an accounting method to report income and expenses. The two most commonly used methods are cash and accrual. You select the method when you file your first tax return and it must be used for all subsequent returns unless you get IRS approval to change.

Cash Method- A popular choice for small business because of its simplicity. To determine gross income, add up the cash, checks and fair market value of property and services you receive during the year. Expenses are usually deducted in the year they are paid.

Accrual Method- This method required by GAAP (generally accepted accounting principles). GAAP prohibits recording in incoming payment as revenues unless you have earned it. But if you have earned the revenue, you must recognize it (record the revenue on your books) even if you have not received any payment.

Choosing a Tax Year- Calendar vs. Fiscal

Each taxpayer must figure taxable income on the basis of an annual accounting period for keeping records and reporting income and expenses.

Calendar Year- runs from January 1 through December 31 and generally may be adopted by anyone. In some instances, a calendar year is required.

Fiscal Year- runs for 12 consecutive months ending on the last day of any month except December.

What are the different types of Business Structures?

Sole Proprietor- an individual who owns an unincorporated business by themselves.

Partnership- a relationship where two or more persons join together to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

Corporation- a relationship where prospective shareholders exchange money, property or both, for the corporation's capital stock. Profits are taxed to the corporation when earned and then taxed to the shareholders when distributed as dividends.

S Corporation- a corporation. meeting certain criteria, that elects to be treated as an S Corporation. Generally an S Corporation is exempted from income tax; the shareholders report the S Corporation's income, deductions, loss and credits on their individual tax returns.

LLC- an entity -statutorily authorized in certain states- that is characterized by limited liability for debts similar to that of a Corporation, managed by members or managers and pass-through taxation similar to that of a partnership