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Online Bookkeeping Solutions Blog

The Online Bookkeeping Solutions Blog is an timely collection of interesting and helpful information for those companies who want to outsource their bookkeeping solution and utilize bookkeeping services by subscription. Outsource your bookkeeping to a cloud based solution backed by experienced CPA's.

Choosing a Calendar or a Fiscal Year

Something worth thinking about when starting a business is the decision to report on a calendar year or a fiscal year. A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. A fiscal tax year is 12 consecutive months ending on the last day of any month except December.

Most U.S. businesses report their taxable income on a calendar year. Businesses that would benefit from reporting on a fiscal year are those that, for example, are highly seasonal by nature—such as a restaurant in a summer resort area. For this type of business, reporting on a fiscal year would provide a better measure of how the business performs over its natural cycle.

Once your business has decided on either the calendar or fiscal year, you’re pretty much locked into it. And depending on how your business is set up, your choices may be limited in the first place. For the most part, sole propeitorships, S corporations, and partnerships use the calendar year.

If you’ve already filed under a calendar year and want to move to a fiscal year, or vice versa, you have to show the Internal Revenue Service there is a legitimate business purpose for doing so. With the exception of a sole proprietorship, if you can show there is a business reason for operating under a different tax year, the Internal Revenue Service can make an exception. That reason would likely be the seasonal nature of your business.

 

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Measuring the Deficit: Cash vs. Accrual Accounting

There are two methods of keeping track of a business’s income and expenses: the cash basis and the accrual basis method. These methods differ primarily in the timing of when sales and purchases are credited or debited to your accounts.

If you use the cash basis method, income is counted when payment is actually received, and expenses are counted when actually paid. This method provides an accurate representation of cash flow, but since it does not recognize receivables or payables, it is not an accurate method of measuring profit.

Under the more common accrual basis method, transactions are counted when they happen, regardless of when the money is actually received or paid. Under GAAP, companies must report financial statements using the accrual based accounting method.

One disadvantage of the accrual basis method is that it is more complicated and expensive to implement than the cash basis method. However, accrual basis accounting provides a more accurate picture of how a business is performing over the long-term than the cash basis method, and is thus a much more accurate method of measuring profit.

The most significant way your business is affected by the accounting method you choose involves the tax year in which income and expense items will be counted. If you incur expenses in the 2010 tax year but don’t pay them until the 2011 tax year, you won’t be able to claim them in 2010 if you use the cash method. But, you would be able to claim them if you use the accrual method, since transactions are recorded when they occur, not when money actually changes hands.

As you choose or revise which accounting method you prefer for your business, keep in mind that using an online bookkeeping service and storing your financial information in the cloud will ensure that your records are most accurately maintained.

 

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