In the good old days, a shoebox and a bank account was all we needed for our bookkeeping and reporting requirements. Those days are long gone.
The next level of accounting was a stop higher called Cash Accounting. This type of bookkeeping is most often utilized by most Chiropreneurs.
In a cash accounting method of bookkeeping you record your income when received; and post expenses when paid. Cash in. Cash out. Your basic financial reporting and tax returns reflect collected income minus paid overhead to determine taxable income (profit).
Cash collected would include payments received in the form of cash, checks or credit card payments to your office. Whether or not the receipts are deposited into your bank account, they must still be posted and reported in order to be in compliance with the state and federal laws. In other words, just because you collect cash and never deposit, you can’t underreport. You must include these transaction on your tax returns or risk severe penalties and prison.
Cash Accounting is a very simple and easy to implement bookkeeping system. You don’t even need software to maintain good records, but, the big advantage to using a software program is a structured, organized and balanced set of books as you cannot close your bookkeeping until you are in balance.
Your basic cash accounting system will enable you to run normal financial statements often required by your bank, investors and of course yourself, so you can see the current status of the practice. You will generally 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 do not accurately represent your current financial condition because important information is missing.
Accrual Accounting
The missing information when you employ cash accounting is: Income Uncollected and Expenses Unpaid.
In cash accounting you are only posting, recording and reporting ACTUAL cash collected and ACTUAL expenses paid. During the same period, you will have income uncollected, called Accounts Receivable, and expenses that you have not paid yet, often due to lack of funds.
When not included, then your financial condition is inaccurate and can lead to the wrong decisions and potentially misleading others whom are relying on your financial reporting to extend credit.
Accounts Receivable
Accounts Receivable are the results of “billing” for services rendered or products sold that you have not received payment.
Accounts Receivables are created when you submit a claim to the insurance company or send an invoice/statement to an attorney or your patients. Each transactions billed, creates a line item in your system representing future expected income collected.
Expenses
The other category captured with Accrual Accounting is unpaid, but invoiced, expenses, leases and notes payable. When you receive an invoice for the practice, it is posted as an expense immediately whether paid or unpaid. This method reflects your total cost to operate the practice, not just those you paid.
Accurate Reporting
When you select the accrual accounting method you have an accurate report of the financial condition of your practice.
Income not includes the total of all goods and services provided during the accounting term whether collected or uncollected. And, the cost to conduct business includes all obligations of the practice whether paid or unpaid.
The bottom line is a true representation of your actual profit or loss for the period.
Tax Filing Method
You may maintain your accounting using the accrual method and report your taxable income using the cash method, depending on which method provides you with the mot favorable taxable method.
The purpose of this article was not to provide you with any legal or accounting advice, but, to encourage a dialogue with your attorney or CPA to establish a method of accounting that will enable you to better manage your practice with accurate and more reliable accounting and to maximize your ability to reduce your taxable income.
Peak your practice with accrual accounting.
Lawton Howell is founder and chief executive officer of WellnessOne Corporation, a national alliance of chiropractic offices. The WellnessOne System includes marketing, leadership, human resources, legal, financial, architectural, protocols and systems for growing a practice using turnkey resources. You can contact the author toll free at 877 WELNES1 or 877.935.6371 x201 or email to: ceo@wellnessone.net. For more information on WellnessOne visit: http://www.wellnessone.net. Subscribe to the author’s weekly eLetter, CEObrief, at http://www.chiromarketing.net
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