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 On an accrual base system, the income and expenses are recognized when they are earned. Your income is recognized when the service is completed or invoiced to the customer. With a cash base system, income and expenses are recognized when they are deposited or paid. You recognize your income when the money is actually deposited in the bank. So what does this mean to a business owner? Generally speaking, for management purposes, we like to recognize our income when it is earned. This allows for reporting of receivables and payables, which gives you a more accurate picture of your business and allows for better management reporting on an ongoing basis. Here's the kicker, for tax purposes, it's usually best to report on a cash basis, thus avoiding recognition of income that has not yet been received by the end of the year. |
