logo

Methods of Accounting

Before you start, you will need to decide what form of accounting your business will use.

There are two major types:

Cash Basis Method 
This is what the name implies; you recognise income when you receive the cash and you recognise expense when you pay the bill. Most service businesses operate on the cash basis because it is much simpler to understand.

Accrual Method
 Here you match revenue with expense regardless when the cash may or may not be collected. If you sell a product to a customer and he doesn't pay you for 30 days, the sale is recorded in the books on the day that you made the sale. When the money comes in the "accounts receivable" is then turned into cash. The same with expenses: if you incur an expense on one month but don't pay until the next month, the expense will be recognised in the month in which you incurred the expense. If you're in manufacturing or deal with stock, the Inland Revenue Department generally requires that you be on the accrual basis.

Keeping Separate Business Records
Even in a small business you should, before you start, set up a business account even if you're a sole proprietor. It will be important to keep your business records separate from your personal records. This will make it easier for you and your accountant to pull records together for income taxes when the time comes.





jigsawA

slogan2