May 7, 2010
Choosing The Right Way To Account For Sales
Choosing The Right Way To Account For Sales Cliff Ennico www.creators.com "Last year I started a business selling on eBay. I'm doing my taxes now, and my accountant is telling me I have to choose between the 'cash' and 'accrual' methods of accounting. Frankly, I haven't been doing any accounting as such. When people pay me, I just deposit their checks or money orders into my business checking account (I'm not using PayPalReg; yet, though I plan to next year). Could you please explain the difference between these two accounting methods in language I can understand?" As Curly Joe Howard of the Three Stooges used to say, "soitenly." The IRS allows small businesses to use two different accounting methods - the cash method and the accrual method. Under the cash method of accounting, you report sales when, and only when, you actually receive the "cash" from your winning bidder. So, if someone buys something from you on eBay and pays with a check money order, you do not report the sale until the check or money order has arrived. If you hold onto the check for a few days before depositing it in your account (as many folks do, especially in late December when they're trying to 'push' income into the next tax year), it doesn't matter - you record the sale when the buyer's check hits your mailbox. EXAMPLE: Joe sells laptop computers on eBay. Joe puts a laptop computer up for sale on eBay using a 7-day "traditional" auction format, closing on Sunday night. At the end of the auction Mary is the winning bidder at $500. Mary elects to pay by personal check, and mails the money order to Joe on Monday morning. Joe receives Mary's check on Thursday, deposits it in his business checking account on Friday, and the check clears the same day. Using the cash method of accounting, Joe records the $500 sale on Thursday, when he receives the check from Mary. Under the accrual method of accounting, you report sales when you have the legal right to payment, even if you haven't received the cash yet. So, if someone buys something from you on eBay and pays with a check or money order, you can report the sale as having occurred the moment the auction ended, even though it will be a few days yet before you receive the buyer's check or money order. EXAMPLE: Mary sells Barbie Dolls on eBay. On Monday, Mary puts a genuine 1971 "Malibu Barbie" (the one with the sunglasses sewn to her head) up for sale on eBay for a fixed price of $1,000 using eBay's "Buy It Now!" feature. On Wednesday, Alphonse clicks the "Buy It Now!" button and buys the Malibu Barbie doll for $1,000. Alphonse chooses to pay for the doll by personal check, and mails the check to Mary on Thursday morning. Mary receives the check on Monday and waits until Tuesday to deposit the check to her business checking account, which means the check doesn't clear the bank until the following Friday. Because Mary uses the accrual method of accounting, Mary must record the $1,000 sale on Wednesday - the day Alphonse buys the doll on eBay and becomes legally obligated to purchase the doll - even though Mary doesn't actually receive "good funds" until the following Friday, when Alphonse's personal check clears her bank. Under either the cash or accrual method of accounting, holding onto a check or money order for several days before depositing it does not affect in any way the recording of the sale. You record the sale either when the check or money order arrives in your mailbox (cash method), or when the eBay auction closes and the winning bidder has been identified (accrual method). If you have a PayPalreg; account and use the cash method of accounting, you record a sale when the buyer's payment hits your PayPalreg; account. Still not sure what to do? When in doubt, select the "accrual" method of accounting. Just about all eBay selling businesses have inventory, and the accrual method of accounting gives a more accurate picture of sales and income for a business that has inventory. Besides, when you find yourself selling more than $1 million worth of stuff on eBay each year (you should be so lucky, right?), the IRS is going to require you to use the accrual method of accounting anyway, so you might as well get familiar with accrual accounting now. Hey, you never know . . . Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. His latest book is 'Small Business Survival Guide' (Adams Media, $12.95). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2006 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.

Posted by Staff at 1:48 AM