Financial and Management Reports
Probably the most crucial aspect of running your business—and the one most often not given the professional attention it deserves—is bookkeeping and accounting. This is truly the bottom line, and many startup business owners take it upon themselves without the proper training or they find the closest person with no experience to try to help them. Your business deserves more than that! There are two different types of reports. Both sets of reporting will be useful for business owners. Financial reports are usually issued on a monthly, quarterly, and annual basis. Management reports include information that will be disclosed only to the internal management to be used to make decisions within the company. Financial reports start with the construction of the chart of accounts.
The two main methods of accounting are the cash and accrual methods. Even if you don’t handle your own financial reporting, it’s vital to know how each one works, so you can choose the best bookkeeping practices for your business.
What Is the Cash Basis Accounting Method?
With the cash basis of accounting, you record income as it’s received and expenses as they are paid. This does not take into account any accounts receivable or payable, as it only applies to payments from clients when the cash is in hand, and expenses when the transaction clears your bank account. Here is an example. If you invoice a client for $895 on March 1 and receive payment on April 15, you would record the income in April’s bookkeeping. This is when the money was actually received. Many small business owners choose the cash method of accounting because it’s a simplified bookkeeping process. It’s easy to track money as it moves in and out of your bank account because there’s no need to record receivables or payables.
Additionally, your small business doesn’t have to pay income tax on any revenue until the moment it’s deposited into your bank account. One downside to using the cash basis of accounting is that it can produce an inaccurate overall picture of your finances. Because it doesn’t account for all incoming revenue or outgoing expenses, it can lead you to believe you’re having an exceedingly high cash flow month, when in actuality this is a result of last month’s work. In other words, you are receiving the money paid for products or services performed last month because the customers are paying the invoices that you sent them for these activities.
What Is the Accrual Accounting Method?
The accrual basis of accounting is basically the complete opposite of the cash method. Income and expenses are recorded when they are billed and earned, regardless of when the money is actually received and deposited. Using the example from above, and applying the accrual basis of accounting, you would record the $895 as income in March’s bookkeeping versus in April, when you actually received the funds. The upside to using the accrual method is it gives small business owners a more realistic idea of income and expenses during a certain period of time. This can provide you and your advisor with a better overall picture of how your business is doing and where it’s headed in the future. One drawback to the accrual method is that it doesn’t account for cash flow or funds that are available in your bank account
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