Cash-Basis Accounting. For simplicity, most small businesses account using the cash-basis method, recording income when it is received and expenses when they are paid. For businesses that generally do not require significant inventory or assets, a single-entry accounting system may suffice. Activity is recorded on the income statement, with little attention paid to the effect on the balance sheet. Records can be kept in a computerized spreadsheet, and then given to a tax preparer to make adjustments for non-deductible items to arrive at taxable income.
Tax Tip – A taxpayer man not delay the recording of income that has been constructively received, by placing money for services rendered into a non-business holding account.
Accrual Accounting. In some instances, a small business may benefit from the accrual method of accounting, which records income when earned and expenses when incurred, giving rise to the need for a double-entry accounting system to record accounts receivable and accounts payable.
Tax Tip – A taxpayer who receives an advance payment for services under a contract, may elect to postpone the unearned portion provided the services are to be performed by the end of the next year.
Bookkeeping Software. Accounting software programs, such as Quickbooks Online, are helpful in recording double-entry accounting, which tracks the impact of the balance sheet accounts. For example, if you receive a $5,000 fee for services rendered, you would book that as Revenue, which would automatically increase the assets in your Operating Account. Similarly, if you expended $1,000 in expenses, this would decrease your assets. The balance of $4,000 in the operating account would constitute your equity in the firm. If you borrowed $500 from a bank to open the business, you would not book this as Revenue, but rather as an Asset and Liability, with no effect on equity.
ASSETS – LIABILITES = OWNERS EQUITY