\
Keeping your financial records in order requires professional expertise, but there’s nothing better than also knowing the basics of accounting so you can truly understand where you are situated as a business. It doesn’t matter as long as you have a reliable team that can handle your requirements effectively if you are not an expert on this. It is always a plus though to be able to understand what they make of your records. Or else, you leave a lot of room for error which can get you in trouble with the law. To avoid this, you can begin by developing an appreciation of the two basic accounting methods being used universally – cash basis and accrual.

Listing down your expenses in your financial accounts the moment you have actually given out the cash and list down your profit when you have actually received payment and credited it in your bank account is referred to as cash basis accounting. If you began a software development project in November 2010 but got paid for it in March 2011, cash basis accounting will have you entering this revenue in your 2011 report. This is a simple way of handling financial records and this is also used by small businessmen. The main advantage of this method is that it allows the businessman to keep track of how much cash is actually available because expenses and profits are recorded only when they have actually exited and entered the bank account.

In contrast, accrual accounting is when you list down your expenses before you have given the cash and your profit before you have received the cash. If you sell books wholesale, you list down your revenue on your accounting books for the year when the transaction was completed even when you have yet to receive payment. In the same way, you list down your expenses for shipment and other cash outlays even when the money has not exited the business’ bank account yet. This is usually how corporations’ financial reports are handled. The problem with this method is that cash available does not necessarily tally with what the records are saying because here, you already deduct expenses and add revenues before they even materialize in the bank account.

These two methods will also create a difference in terms of taxes. Those who use cash accounting can ask that payments be put on hold till the following year so their current year income and income tax can be reduced. It works the other way around for those who use accrual accounting where the businessman pays taxes based on what is reflected on his accounting records, whether cash has been credited to the bank account as payment or deducted as an expense.

On the hunt for an Irvine accountant? A Accountants Irvine? Find the best at OCTaxCPA.com where professional accountants don’t just come with qualifications but with the kind of track record you’re looking for.