Accounting

Accrual vs. Cash Accounting, Explained

A business that keeps its financial records (“books”) on the CASH basis (or method) records revenue when RECEIVED and expenses when PAID. It’s simple, and the income statements reflect the true CASH inflow and outflow of the business. The downside is the financials may not truly reflect the value created or lost, at least not when it’s created or lost.

Case Study: Minority Share Buyback

This case study is based on the experience of a business owner who owned 70 percent of his business. The balance was owned by two individuals, one of whom owned 20 percent and was causing much difficulty. The controlling shareholder wished to reacquire the shares of the troublesome stockholder, whose interest was valued at $200,000. But after working through the numbers, the business owner decided that the cost to the company would be too great. He decided to simply live with the troublesome minority shareholder.

Owner Stock Repurchase Tax Traps

Some very tricky rules apply when a company buys back stock of shareholders or related entities. Recognize that this is a very complex area and get expert advice before effecting any corporate stock repurchase.

Example #1: If the company redeems or buys back part of a shareholder’s stock, the full amount paid (not just the profit) to the stockholder may be taxed as a dividend at ordinary income tax rates up to 38.6 percent, rather than at the capital gain rate of 20 percent.

Should You Switch to the Cash Method?

The IRS will allow businesses with annual revenue as high as $10 million per year to use the cash method of accounting. Owners of businesses with revenues below this level that are not currently using the cash method should consider doing so as it generally allows for greater control of when revenue and expenses are recognized. The primary benefit of having such control is ability to delay recognition of income and thus delay when income taxes are due and payable.

Business Basics: Gross Profit and Gross Profit Margin

Your gross profit and gross profit margin are two of the key ingredients in a successful business. Even though revenue is important, your firm’s gross profit is more relevant. In addition, the gross profit margin provides the cash your business needs and it drives the bottom line. Maintaining healthy profit margins on individual sales is critical since one losing product line can have a significant negative impact on your company.

Should You Pay for Audited Financial Statements?

Should you, the owner of a privately held business, pay for an accountant or accounting firm to compile, review or audit your financial statements? For the vast majority of business owners, it’s a choice. The correct answer to “should I” is not readily apparent. It’s a judgment call.

Bookkeeping and Accounting Basics

While keeping track of your business’s finances may seem overwhelming, it’s not that hard when you know the basics of accounting and bookkeeping. Bookkeeping and accounting share two basic goals:
A. To keep track of your income and expenses, which improves your chances of making a profit.
B. To collect the financial information necessary for filing your various tax returns.

Accounting

Accrual vs. Cash Accounting, Explained

Case Study: Minority Share Buyback

Owner Stock Repurchase Tax Traps

Should You Switch to the Cash Method?

Business Basics: Gross Profit and Gross Profit Margin

Should You Pay for Audited Financial Statements?

Bookkeeping and Accounting Basics

Business Guidance Topics

Stay Connected