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.