Trick Entrepreneurship

Summary :

Deciding on which basis of accounting to use for your business will determine how you record your transactions in any given period. Of the several methods, whichever is chosen, the business owner must be consistent in its use thereof for tax reporting and bookkeeping purposes. In order to change, they must file a request with the IRS. The most common bases of accounting are the accrual basis, the cash basis, and the income tax basis.

The accrual basis of accounting records transactions in the same period of which the related transaction occurs, regardless of whether cash is received or not. For instance, if you purchase equipment in 2009, but don’t pay for it until 2010, under the accrual method you would still include the purchase on your books for 2009. The purpose here is to match the income and expenses in the same period. The IRS has clearly defined tests that outline these events. For instance, income is considered earned on the earliest date of these occurrences:

· When you receive payment.

· When the income amount is due to you.

· When you earn the income.

· When title has passed.

And expenses become deductible when:

· The all-events test has been met. The test is met when:

o All events have occurred that fix the fact of liability, and

o The liability can be determined with reasonable accuracy.

· Economic performance has occurred.

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