Small Business Accounting

Your Fiscal Year Rules

All accounting systems start and end with your fiscal year. A fiscal year is the 365-day period that you choose as an operations period as reported to the IRS. Most businesses, including personal service businesses, partnerships and sole proprietorships are required to use a calendar year for their fiscal year. This means their fiscal year and the calendar year are interchangeable, with both starting January 1 and ending on December 31st. Other businesses, concluding Limited Liability Corporations, S Corporations and retailers, can choose to alter their fiscal year because they are generally too busy at the end of the calendar year to comply with all the regulations about reporting the previous 4th quarter’s income, which may not be summarized until the following January.

Common Small Business Accounting Systems

Manual systems are expected to record and summarize all the transactions a business does over the course of a year, including disbursements, receipts, accounts payable and receivable, equipment depreciation, accrued taxes and accrued payroll. These summaries are necessary to complete required tax filings as directed by the IRS, no matter if you use a simplified Schedule C Form 1040 or more complicated tax reporting as required by larger companies and corporations.

All accounting systems break down into four different types:

Double-entry

This systems offers a simple balance sheet. For every entry made on the expense or debit side of the column, an offsetting credit entry must be recorded on the income side. Every negative must be balanced by a positive, and debit must be offset by credits. Everything is in balance.

Single-entry

This system used single debit entries that are not balanced by credits. Checkbooks and cash register tapes fall into this category, as do simple expense logs

Cash-basis

This system records income at the time it’s received, while expense are deducted when they are paid. While this is an easier system to use, favored by sole proprietors, it provides less information useful to managing your business or make forecasts.

Accrual-based

This system records income when it’s earned, which means that it’s recorded even if the cash for the sale has not yet been received. Expenses are deducted as they occur, also not tied to an exchange of cash for vendor bills which can be paid at the end of the month. This systems is required by the IRS for all businesses that have an inventory.

Small business accounting doesn’t have to require a lot of time in order to work, but it sometimes does require patience and persistence in order to promptly record entries. Lost receipts are the bane of any business, as are lost checks or checks entered in the wrong parts of a ledger or accounting program. Careful attention to detail is necessary, so when your figures are delivered to your CPA at tax time, he won’t spend additional time to search for missing items or those buried in other sections, and you won’t be charged accordingly for your CPA’s additional time.