The $5 Million Threshold (and rules for a NEW game of Commerce!)
In the United States, there are two Methodologies for Accounting Reporting. There is the "CASH METHOD" and the "ACCRUAL METHOD".
Companies larger than $5 Million must use the ACCRUAL METHOD. Companies doing less than $5 Million in sales have a choice between the two (with a few exceptions).
NOTE: If you're a commercially oriented individual without a Company, think of yourself first as a Small Business Owner, as we're all small business owner's in our own commercial plays. If you outgrow our mindset, at least you'll have good roots.
The CASH METHOD of Accounting results in a very straight forward bookkeeping process with the lowest time and costs investments.
If you do under $5 Million in Sales, you should use the "CASH Method" of accounting unless you don't qualify for some reason or a conversation with a Tax Professional leads you to believe otherwise (rightly or not).
The method you use for your Accounting is realized by the way you do your books and it is identified to the Tax Authorities via a check box on your tax form.
With the "CASH METHOD", all you need to do is retrieve your records from your banking institution after they post and categorize them with a limited set of categories defined by your Tax Authority. It's just that simple.
NOTE: if you want or need to do business in CASH, we will provide insight on that below. If all business runs through your bank accounts it keeps the reporting extremely simple. Unfortunately it also maximizes the revenue for our Tax Collectors. If the Services our Government was providing was worth the contribution that would not be a big deal. Unfortunately our Government Servants are no longer behaving in an acceptable manner with our money, making this all now a much bigger deal.
The ACCRUAL METHOD of Accounting is more complex than the CASH METHOD because you must also pay taxes on Accounts Receivable and Accounts Payable too.
Many small businesses doing CASH METHOD accounting track their Accounts Receivable and Accounts Payable, so what's the difference?
The difference is that that tracking for Small Businesses for these items need be less perfect as it's for their own private use only. No taxes are assessed on those records as they are for bigger companies.
It's a bit like Karma.
You can count it any way you'd like, but it's still all there no matter how you want to parse it!
expand for a small bit more...
Welcome to a new round of "Who wants to Build a Paradise?" !!
The "CASH" Method of Accounting
The "CASH" Method of Accounting is currently reserved for those in Small Business only. The threshold in the United States is $5 Million or less in revenues, with a few exceptions.
The CASH Method of accounting before Bank Accounts could easily produce paper statements was about cash receipt tracking and reporting.
With the advent of BANKS, Monthly Bank Statements, the creation of the FED, and more rules that most can fathom, the game plays far different than it did in coin satchel times.
The date the bank has for the transactions are all that is important for CASH Accounting.
Those dates are called "Post" Dates, because that is when the transaction was "posted" at or to your bank.
The "actual transaction dates" (the dates a transaction transpired vs the date the information got to your bank) are irrelevant in the CASH METHOD of Accounting (for the most part).
Stating this again slightly differently for clarity, the CASH Method of accounting presumes you earn money on the date it shows up in your bank as a deposit and it presumes you spent money on the day that money is removed from your bank account.
On the income side of things, the only date that is relevant for keeping score in your game of commerce is the date the money posted to the bank. The date you 1) sold the product, 2) performed the service, 3) sent out the invoice and/or 4) took receipt of a check is completely irrelevant.
On the expense side of things, the only date that matters is the day the the transaction posted in your checking or credit card account. The day and time you incurred an expense is irrelevant..
But what about DOING BUSINESS IN CASH you old schoolers ask? GREAT QUESTION! We have that education covered too!! (expand for more!...)
Doing business "in Cash"....
If you don't deposit all of your sales into your checking account, the commercial game gets a bit more tricky.
If you don't want to deposit them because you don't like banks or you want more privacy, BUT you want to claim all your sales for taxes, just keep a cash sales journal and all those sales can be properly worked into your reporting.
If you don't want to deposit them because you are tired of paying taxes into State and Federal Governments who have, with the COVID 19 Pandemic, shown a level of incompetance and Fascist Orientation that is beyond your tolerance levels, that is called "skimming". It's technically illegal according to US Tax Law, which was only established illegitimately after the creation of the FED in 1913.
There may or may not be karmic consequences to skimming depending on your motivations, and there will only be financial or legal consequences if you get caught. ( < ask John McAfee about this. He's working through it now!)
If you are going to do this, learn how the entire Accounting System and Cycle works and then develop a strategy with an appropriate amount of risk for you.
NOTE: IF you ever want to get a loan from a bank, they use your last two years of income taxes for income qualifying. If it's not on your income taxes it doesn't count! Play wisely!
If you pull cash out of your bank account for legitimate expenses or spend cash sales money on legitimate expenses, this gets a bit trickier too.
You'll need to be more conscious of saving individual receipts, and you'll need to keep a cash journal so you can work them into your formal reporting.
If you want to pull cash out of your bank for illegitimate expenses, you're better off trying to make them look legit or skim on the income from the get go.
The "Cash" Method of Accounting keeps things really simple if everything runs through your bank accounts.
If you skim a bit or prefer to carry cash around, it's more complex.
As the Dali Llama may or may not have uttered, Learn the Rules First, then learn how to Cheat with class and the stealth of a CAT! (please note, this should not be construed as financial advice. Cats don't have that license!)
The BOOKKEEPING PROCESS for the CASH METHOD is Straight Forward and Simple...
To do proper Accounting inline with the Cash Method, all you need to do is download your transactions from your bank each month (or whenever you want), categorize them in a way that aligns with your Tax Reporting requirements (or another way that complicates things more but can work), and then ask your software to produce 1) an Income Statement and 2) a Balance Sheet for your review.
The Income Statement, which is better thought of as a "Net Income Statement" will provide you with Total Sales numbers (gross sales numbers) and Total Expenses. Total Income - Total Expenses is referred to as "Net Sales" and/or "Profit". If the difference is negative, it's referred to as "Net Sales" or "Loss".
The Balance Sheet, which is better thought of as a "Comparative Net Worth Statement" provides two important facts. 1) It establishes a Company Net Worth for a Given Date AND 2) It provides a "mathematical crosscheck" of your Categorization of Transactions as compared to known values at your bank at two different points in time for an integrity check of your transaction categorization process. This cross check does not preclude cheating in the Accounting process, but it does precluded egregious cheating and egregious errors.
The "ACCRUAL" Method of Accounting
The "ACCRUAL" Method of Accounting presumes you have earned money when services were provided and/or when you bill for them, as opposed to when the money enters and leaves your bank.
The "Accrual" System of Accounting is more complex because you can NOT just go to your bank, get your transactions, download them and categorize them for easy reporting.
The dates at the bank are irrelevant for purposes of reporting.
In that sense, it's the exact OPPOSITE from "CASH" Method of Accounting where the date your bank records transactions is golden.
As mentioned above, the ramifications of this and/or a byproduct of this is far greater importance on tracking your Accounts Payable and Accounts Receivable.
Ironically, if you have a generally short turn around time on Payables and Receivables, those required to do ACCRUAL Accounting can (and most will) just do CASH Accounting and then make adjustments for receivables and payables at the end of a reporting period.
The TAKE AWAY?
ZAP Accounting Software and the Flagship Bookkeeping Template was conceived as a tool for Small Business People. It's been promoted as a "Silly Spreadsheet" for a few years now.
The reality of it?
With the addition of the Fully Functional and Customizable Balance Sheet in the Spring of 2020, as the Coronavirus vs COVID 19 battle played out, this 'Silly Spreadsheet" morphed into an open source database solution acting on a Spreadsheet Platform for greater functionality than could ever be had in a more limiting, "traditional" database infrastructure.
If you can't read between the lines properly...
ZAP Accounting Software and our Bookkeeping Template is no longer just a threat to Intuit. It's a MAJOR threat to every major Accounting Software Producer on the Planet. And in fact. the commercial threat goes way beyond just Accounting Software vendors. If you don't believe us, just ask them!
Welcome to a new Game of Commerce.