In the good old days, a shoebox and a bank account were all we needed for our bookkeeping and reporting requirements. Those days are behind us.
The next level of accounting was a higher stop called Cash Accounting. This type of accounting is the most used by most chiropractors.
In a cash method of accounting, you record your income when you receive it; and post expenses when they are paid. Cash in. withdraw cash Your basic financial reports and tax returns reflect revenues collected less overheads paid to determine taxable income (profits).
Cash collected would include payments received in cash, checks, or credit card payments to your office. Whether or not receipts are deposited into your bank account, they must be posted and reported to comply with state and federal laws. In other words, just because you collect cash and never deposit, you can’t understate. You must include these transactions on your tax returns or risk severe penalties and imprisonment.
Cash accounting is a very simple and easy to implement accounting system. You don’t even need software to keep good records, but the big advantage of using a software program is a structured, organized, and balanced set of books, since you can’t close your accounting until it’s in balance.
Your basic cash accounting system will allow you to run the normal financial statements often required by your bank, investors, and of course yourself, so you can see the current state of the practice. Typically, you will run a Profit and Loss Statement: Income – Expenses = Profit and a Financial Statement: Assets – Liabilities = Net Worth (Owners’ Equity)
Here’s the problem with cash accounting: Your financial records don’t accurately represent your current financial situation because important information is missing.
precision accounting
The information that is missing when you use cash accounting is: uncollected income and unpaid expenses.
In cash accounting, you are only accounting, recording and reporting ACTUAL cash collected and ACTUAL expenses paid. During the same period, you will have uncollected income, called Accounts Receivable, and expenses that you have not yet paid, often due to lack of funds.
When it is not included, then your financial condition is inaccurate and can lead to poor decisions and potentially mislead others who rely on your financial reports for credit.
accounts receivable
Accounts receivable are the results of “invoicing” for services provided or products sold that have not received payment.
Accounts receivable are created when you file a claim with the insurance company or send a bill/statement to an attorney or your patients. Each billed transaction creates a line item in your system that represents the expected future revenue collected.
Bills
The other category captured with Accrual Accounting is Unpaid but Billed, Expenses, Leases, and Notes Payable. When you receive a bill for the practice, it is recorded as an expense immediately, whether paid or unpaid. This method reflects your full cost to operate the practice, not just what you paid.
Accurate reports
When you select the accrual method of accounting, you have an accurate report of the financial situation of your practice.
Revenue does not include the total of all goods and services provided during the accounting period, whether collected or not. And, the cost of doing business includes all obligations of the practice, whether paid or unpaid.
The end result is an actual representation of your actual profit or loss for the period.
Tax return method
You may do your accounting using the accrual method and report your taxable income using the cash method, depending on which method gives you the most favorable tax method.
The purpose of this article was not to provide you with legal or accounting advice, but rather to encourage a dialogue with your attorney or CPA to establish an accounting method that will allow you to better manage your practice with accurate and more reliable accounting. to maximize your ability to reduce your taxable income.
Optimize your practice with accrual accounting.
