What You Never Knew about Revenue and Expense

If you are new to running a business, accounting can be confusing, which is all the more reason to hire a CPA. Even with the help of a CPA, however, there are certain basics you should understand. How to account for revenue and expense is one of them.

There are two basic ways to account for revenue and expense, the accrual and the cash methods.

The accrual method of accounting is the less popular, although it is required by IRS for tax preparation if inventories are a significant factor for determining profit and loss, or your annual revenue exceeds one million dollars. The purpose of an accrual method of accounting is to match income and expense in the correct year. The accrual method of accounting records revenue as it is earned and expense when it is incurred regardless of when payment is received or expense paid. For example, David produces three widgets in December of 2014, delivers them and bills his customers in December. The widgets are priced at $100 apiece and cost $50 each to produce. Payment of $300 is received from customers and the $150 cost of production is paid in January, 2015.

The accrual basis of accounting requires that, regardless of when actually paid, the amounts due from customers, totaling $300, be recorded as December, 2014 revenue and the costs of $150 be recorded as December, 2014 expense, since this is when the cost of making the widgets was incurred and when delivery took place. In January, when the payment is received, David will record the customer’s remittances, not as income, but only as cash received and will record payment of the costs incurred in making the widgets, not as expense, but as cash disbursed.

If you are doing your own accounting, it is best you consult with a CPA to ensure you are using the right method and using it correctly. Not only will the CPA help ensure your records are accurate, he/she can help you better prepare for tax time, when the way you have recorded revenue will affect your filing.

For more information, contact Myerson & Myerson, CPA’s at 703-753-1040 or via email at info1@mandmcpas.com.

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