Attention Cash Basis Bookkeepers: Watch for Accrual Entries

Most small businesses maintain their bookkeeping on a cash basis of accounting, recording revenue and expenses only when money flows in or out. By contrast, accrual accounting records revenue when earned and expenses when incurred. Cash basis is easier and provides a satisfactory financial picture if your business is generally paid promptly by customers and pays its bills immediately upon receipt. Nevertheless, some transactions are necessarily accounted for as accruals even by cash basis operations. These are most often amounts that will be remitted in the future for taxes.

For example, payroll taxes are expensed by a business on payroll dates, but remitted on future days. Payroll taxes that are deducted from employee pay are part of the company’s expense for wages, although the withheld amounts are not paid simultaneously with net paychecks. The employer part of payroll taxes is another expense category that’s also recorded on payday.

Because payroll taxes are remitted at a later date, recording the expense on payday is offset by an accrued liability on the balance sheet. If the taxes accrued for remittance in the future are not recorded on the balance sheet, the expense will not appear on the income statement. Profit is therefore overstated due to the missing expense.

When an accrued amount of payroll taxes is eventually remitted, it has no impact on the income statement because the expense has already been recorded. The remittance applies to the accrual on the balance sheet.

To assure accuracy of expenses, it is essential to constantly examine the accrued tax liabilities on your balance sheet. This close watch will help you avoid financial surprises.

Preparing a Business Budget for the New Year

Every business owner has goals, and achieving them requires a bit of planning. Because goals are linked to money, a proper plan includes devoting a little time to budgeting.

Fortunately, you don’t need an elaborately detailed budget like that of a multinational corporate behemoth. Simply having an outline connecting spending and revenue is sufficient. Setting aside a planned amount of cash for spending later assures you have sufficient funds for future plans to succeed. A budget tells you what is and is not a financially sound decision.

Making the Business Budget

You can create a budget using the old-fashioned tools of pencil and paper, but this is only a good starting point. After sketching out a general income and spending pattern for next year, placing the numbers in electronic format will help when filling in the remaining details.

Spreadsheet applications on your computer will work nicely. Perhaps your bookkeeping software gives you an option to place budget figures into it. This will benefit you later when comparing your budget to actual results.

Start the budget process by estimating an amount of monthly revenue based on available resources. Your income is limited by how much time you work, the equipment you possess, and the prices you charge.

Moreover, you may need to adjust income based on your cash resources. That’s because higher income may lead to paying more expenses prior to collecting from your customers. The money you have for expenses puts a cap on how many customers you can serve.

Using the Business Budget

The budget shows a timeline for building cash over time. A controlled growth rate and a tight rein on spending allow your cash to gradually increase. This capital reserve is then available to fund further growth with new customers.

The timing for a rising cash flow depends greatly on when customers pay you. A lot of businesses are paid a month or more after work is completed.

That means your budget will show you deploying your available resources and paying your bills one month, but collecting the revenue over the next month or two.

Over those next couple of months, you will spend more time and money on additional work. Your budget should indicate, however, that you have a little more cash than when you started. That’s because the revenue received exceeds your costs. This is the profit you aim to accumulate and then spend for tackling more customers.

To ensure that you achieve profit accumulation, monitoring your actual business performance is crucial. The budget predicts increasing business cash flow, but turning that expectation into reality necessitates comparing actual to budget.

Obtain your statement of revenue and expenses after the first few months projected in your budget. You want the report that has revenue you already collected and expenses you already paid. Put these numbers in the same spreadsheet as your budgeted revenue and expense categories for the same months.

Is your revenue coming in as you expected? Is your spending on track with the budget?

Most likely, you will uncover areas where you have excelled and others where you’re falling short. Making the necessary adjustments will propel you to meet your annual goals.