What Accounting System will You Use For Your Home Business?

 

Accounting is a necessity in any business, large or small. It is simply process of tracking money coming in and out of your business. Of course there is a lot more to it, depending on the type of business you do. I am currently trying to perfect my accounting for my resale business. It is a process, and I have actually taken accounting classes, with more to come soon. 

In the past I have always been in some form of business management. Each and every business I worked for had different accounting methods, but it was always for the same result. Where is money coming from, and where is money going to? With all of the research, learning, and tracking that you have already completed for your business, now the IRS needs you to choose an accounting method for reporting your income and expenses.

When filing the taxes for your business there are two basic accounting methods, for any other accounting methods, please read publication 538. I am posting the information available in IRS publication 583. Order your publications at the IRS website. If you ever search for the IRS or any government entity, be sure that it is a .GOV site. There are a lot of sites that look like it is authentic, but are scams.

 

Exert from Publication 583;

Choosing an Accounting Method:

 An accounting method is a set of rules used to determine when and how income and expenses are reported. You choose an accounting method for your business when you file your first income tax return. There are two basic accounting methods.

    1. Cash method: Under the cash method you report income in the tax year you receive it. You usually deduct or capitalize expenses in the tax year you pay them

    2. Accrual Method: Under the accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. 

If an inventory is necessary to account for your income, you must generally use an accrual method of accounting for purchases and sales. Inventories include goods held for sale in the normal course of business. They also include raw materials and supplies that will physically become part of merchandise intended for sale. 

You must use the same accounting method to figure your taxable income and keep your books. Also, you must use an accounting method that clearly shows your income. In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows your income. An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. 

More than one business: 

When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. You must keep a complete separate set of books and records for each business.

Changing your method of accounting:

Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. 

End Exert

Your accounting method is not only important to the IRS, but for your business. Since really starting Weeks Finds, my resale business, I have learned that accounting consists of a lot of different areas. There are purchases from many different places, and costs for almost everything is different even if you buy in bulk. You have to keep track of the cost for each item, set prices for items based on cost, then watch how long an item has been in your possession to see if you need to lower the price. There are also times when I purchase something, then realize it is damaged, I have to account for the loss of that item. I currently have quite a few spread sheets going, but I am trying to get the process streamlined. Once the business gets more profit, I would love to invest in an inventory tracking system or a POS. Something that will allow me to spend more time on the sales end of the business, rather then the accounting end.

This is a topic I will probably be delving into more. I have the publication 538, which is accounting periods, and methods. It has a lot more information on accounting methods available and rules to those methods. It is something I want to learn more about for my home business, and would love to share the knowledge I gain with anyone wanting to learn.

Designating the Tax Year for your small business

 This is the third installment on my posts for tax tips from the tax publications. The following is the information that publication 583shares about designating a tax year for your business. From reading it appears that most home businesses, or sole proprietors, will have the calendar tax year, but there are always some exceptions. 

 

Designating a Tax Year

You must figure your taxable income and file an income tax return based on an accounting period called a tax year. A tax year is usually 12 consecutive months. There are two kinds of tax years;

1. Calendar tax year- A calendar tax year is 12 consecutive months beginning January 1st of each year and then ending December 31st of the same year.
2. Fiscal tax year-  A fiscal tax year is 12 consecutive months ending the last day of any month except December. A 52-53 week tax year is a fiscal tax year that varies from 52-53 weeks but does not have to end on the last day of a month.

If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval.

You must use a calendar tax year if;   

• You keep no books or records
• You have no annual accounting period
• Your present tax year does not qualify as a fiscal year
• You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tag Regulations. 

If you have never filed an income tax return for your business, you can adopt either a calendar tax year or a fiscal tax year. Although, some partnerships and S corporations must use a particular tax year. See IRS publication 538 for more detailed information on this.

You adopt a tax year by filing your first income tax return using that tax year. You have not adopted a tax year if all you did was one of the following;

• Filed an application for an extension of time to file an income tax return
• Filed an application for an employer identification number
  
• Paid the estimated taxes for the year

Once you have adopted your tax year you may have to get the IRS to approve a change.  

All of these small tax detail will help you succeed in your business. Take the time to educate yourself in all aspects of your business, even if you use a financial advisor, you should still have some business finance education.