The way you record your company’s financial activities will affect how well you account for your business. Do you track expenses and income manually? Do you create and maintain a ledger or other accounting system to record your transactions? If not, what methods would you use instead? Even if you don’t want to spend the time or money setting up an accounting system, using some of the more useful accounting methods below can still help you keep track of your finances and stay organized.
Let’s see about Accounting Methods-
An accounting method refers to the rules a company follows in reporting revenues and expenses. The two primary methods of accounting are accrual accounting (generally used by companies) and cash accounting (generally used by individuals).
Here are 7 Best Accounting Methods that are Useful
1. Cash Method Accounting
Cash accounting focuses on business transactions involving cash. Using the cash accounting method, a company bookkeeper debits and credits the cash account in each journal entry. Transactions with no monetary input are not included in the financial statements. With this method, bookkeepers debit and credit the cash account in each journal entry depending on the transaction.
Companies using the cash method of accounting record all their transactions in a single cash-based accounting period. This accounting period is known as the “cash method.” It’s a quick, easy and inexpensive way to track your company’s financial transactions. However, certain types of companies—such as real estate investment trusts (or REITs)—must use this method to record their income. If you’re a REIT, you can use the cash method to record all your income and expenses.
2. Ledger System Accounting
If you keep track of your company’s financial activities using a ledger system, you’ll want to keep in mind that different accounting periods will give rise to different entries in your ledger. This means that when it comes time to record your company’s cash flow, you’ll have to track income and expenses in different ledgers. Keep this in mind when choosing a ledger system. If you select a system based on its ease of use, think again. There are plenty of excellent, easy-to-use accounting software options available.
3. Cash-Only Accounting
Cash-only accounting is another from accounting methods which is very useful. If you have no intention of recording your company’s transactions in a separate accounting period, cash-only accounting is probably the best way to go. After all, you have no assets that require recording. This method eliminates the need for you to keep a cash register. There’s no entry required for you to make purchases or incur liabilities. Despite its convenience, cash-only accounting is not without its disadvantages. For one, you can’t count on it to provide you with accurate financial data. The cash register is notoriously bad at recording cash flow. And, cash-only accounting can be more costly than using a ledger system.
4. All-Cash Operations
In some cases, though, you may want to record the cash transactions of an all-cash operation. This is when you record all your company’s sales in one period, without recording the purchase of any assets. Consider the case of a business that runs all-cash. This method records all its sales in one accounting period, without recording the purchase of any assets.
While this is a good way to record sales, it has its downsides. All-cash operations are not recognized by the IRS as a cash business. This means you have no way to prove to the IRS that you’ve generated the profit you’ve boasted about. If you’ve booked all your sales as profit, you can’t easily prove otherwise. You also have no way to verify whether you’ve underestimated your expenses or overstated your income. Incorporate all-cash operations into your company’s liquidation plan if you decide to shut down your business.
5. Debt Collection Accounting
If you own a debt collection agency and/or other debt-related businesses, you may find debt collection accounting beneficial. As you probably know, debt collection can be very profitable. If you keep track of the number of debt collection calls your business gets, you’ll be able to see when and from whom you’re collecting a debt. This information is useful not only in relation to your debt collection agency, but in relation to any other businesses you may own or operate. Keep in mind that debt collection can be unsafe. Debt collectors may use harassment or assault tactics to collect the money owed to them. And, many collectors are unaware that they have a legal right to the info they’re gathering.
6. Pretax Bookkeeping
If you’ve always kept track of your income and expenditures using a spreadsheet or other software, you’re in need of a change. There are many advanced online accounting software options that can help you with this. Keep in mind that when you file your tax return, you’ll need to provide your accounting information. This includes your income and expenses. For example, if you list your income as $100 and expenses of $50, you’ve overstated your income by $50. This is known as an under-reporting of income or expenses.
7. Tax-Free Bookkeeping
If you make less than $1,000 in income per year, you can choose to incorporate your tax-free bookkeeping method into your company’s financial statements. This will help you eliminate certain taxes that you’ll otherwise have to pay. For example, if you make less than $1,000 in profit per year, you can choose to expense your profit as a tax-free item. Keep in mind that tax-free bookkeeping requires a great deal of planning. You’ll have to keep track of your income and expenses, as well as your tax-free itemization of expenses.
Accounting is a crucial part of business. It’s important to keep track of your company’s finances so that you know where your money is going and how you’re spending it. This will help you make informed business decisions and prepare your company for tax payments. When it comes to tracking your company’s finances, there’s no such thing as a perfect accounting method. All you can do is choose the method that best fits your business’ unique circumstances and determine how it can help your company achieve its goal.