Cash
- Income is reported when cash is received. Invoices can be processed in Quickbooks software but have no impact on income until customer/clients make payments to you.
- Expenses are recorded when paid. One may enter bills into Accounts Payable, but the expense is not accounted for until it is paid. An example would be a utility bill in December. If it is paid in January, it is a January expense, not December.
Accrual
- Income is reported when it is earned. Once an invoice is created in the accounting software, that is the time the income is considered earned. It is based on the date the invoice is produced. Cash payments received from customers/clients are applied against Accounts Receivable, not income. Therefore, if an invoice is created in December, income is recognized in December even though one may not receive payment for the invoice until January or later months.
- Expenses are recorded when incurred (or, once the event happens). From the example above, the utility expense recorded in Accounts Payable in December would be a December expense even though it may not be paid until January (based on the date of the bill, not when it is paid).
Year-end strategies:
Cash
- If there are expenses that can be paid before the end of the year, this would help lower the net profit and reduce taxes. Expense such as office supplies, advertising, utilities, or maintenance that has been put off would help lower taxable income if funds are available for these expenses. Consider bonuses to employees before year-end to help reduce net profit if cash is available as well.
- If the receipt of income can be delayed to the following year, this may save money by reducing taxes. This is true if 2013 is a high-profit year for the business for which places you in a higher tax bracket and the following year is not as profitable (and you are taxed at a lower rate).
Accrual
- At the end of the year, consider invoicing in January vs. late December. The income is earned based on the date of the invoice. Businesses that ship goods or bill based on time may have difficulty with this strategy. But those businesses that bill based on projects may be able to push their income into another year more easily.
- Adjusting/Closing Journal Entries are part of the year-end closing of the accounting process based on accrual accounting (Examples: Depreciation, Amortization, Insurance Expense, etc). But it is also important to make sure all bills (such as utilities) that have December dates are entered into the system before the books are closed for the year. Also important is reconciling to financial institution records on loans that are outstanding to record properly interest and principal payments throughout the year and accrue the correct amount of interest expense at the end of the year. This would also include credit cards use by the company. Record all expenses and finance charges for the year. Reconcile all the credit card statements to ensure all charges have been recorded.
One final item: whether one uses cash or accrual accounting, purchase of equipment can be expensed off ones tax return. This is available through code Section 179 that allows direct write-offs of equipment rather than through yearly depreciation expense. Make the purchase before 12/31 to take advantage of the 179 deduction.
In regard to credit cards & Quickbooks software: Quickbooks treats credit card charges as cash. Therefore, record all credit card transactions and reconcile the statements to ensure proper credit for these expenses just like accrual accounting businesses.
Contact LFC for more information: info@lfconinc.com
