The morer straightforward method is cash-basis accounting. Small businesses love this method because it's easy to use. When you receive a payment or paying an expense, you record it in your books and that's that. Let's take Lu for example. Lu does not record any activity in his books until he gets paid. Likewise, he doesn't record any expenses in his books until he has actually sent the check. Listen to a bookkeeper, friend of mine, as they share some insights about using the cash basis method. The one thing that I can say to be the bookkeepers that are servicing clients, that are all on a cash-basis, is that cash-basis can actually be more complex than accrual basis reporting. Because cash-basis, you're not supposed to have accounts payable or accounts receivable. You really have to know your stuff. It's actually harder with cash-basis reporting than accrual basis reporting. You should really understand what's involved in doing all the things you need to do for your clients, such as tracking bills and the invoices, if they're invoicing their clients, but understanding what should be on the cash-basis balance sheet and the cash-basis profit and loss. It's more complex than it looks. The other thing that I can say is that whether you're doing cash-basis reporting or accrual basis reporting, one thing that you're going to be very valuable to your clients for is producing cashflow reports. Here's the cash you had at point a, here's the cash you have at point b, there's a difference, and here's why, as well as cash-flow projections. If somebody wants to know, "Hey, can I afford to buy this machine based on our receivables and our payables and any other big outlays we have coming up? " You can be very useful to them because you can analyze their business and say whether they're going to be able to have the cash in the bank to pay for this. That's where you can really be very valuable to your clients. Like everything in life, there are pros and cons to using the cash-basis method. This method is super simple to use. If you're worried about factoring in future transactions and all of that, forget about it. With this method everything is recorded when it happens. But this method doesn't really give a full picture of income and expenses, just a snapshot of your businesses activity. You can't really get away with using cash-basis for everything. For example, if your business offers credit to customers, you'll have to use something different. Listen to my good friend, share a little more about cash-basis accounting. Most of my clients are cash accounting. The reason why, it's really is because it's easy to use. They understand it. They understand that once they receive money, that's income, and when they spend money that's an expense. The other thing that they like, is the potential tax advantage. They don't have to pay taxes on money that's not in the bank. Versus in the accrual you basically accrue that money and you pay taxes soon as you send out the bill. Then the last thing is, it's all about having the money on hand. There are able to see at a glance where their money is. Like, if it's in the bank, that's money that they've received. If it's been taking hours whether it's a withdrawal or a check, that's money that they have expensed. If they have inventory, you are not able to use cash accounting, it has to be accrual. The other thing is, if we do have certain income that the IRS requires you to actually use cash accounting. Another thing is if they sell or sell products or services on credit, they're not able to use cash accounting. I would say pretty much 90 percent of the clients that come to me, I recommend them using cash accounting, because as I said before, it's all about them understanding why they're having to pay taxes on money. It's easier to explain when they can see that, "Okay, I made this money and it was income and a classified it as an income. Then I have expenses that I have spent. Basically, the income minus expenses is your net income." That's what you're going to have to pay taxes on.
