Today, Dear Reader, we continue the series on the business of writing and welcome back Brigitte A. Thompson as she shares her professional advice as an accountant and author.
A business can be operated under one of three methods of accounting; cash, accrual, or hybrid. The IRS will be automatically informed of your choice when you file your first business tax return. If you decide you would like to change your accounting method, you will need to get approval from the IRS using Form 3115, Application for Change in Accounting Method which is available on their web site IRS.gov.
Utilizing the cash method of accounting, business owners report income when it is actually received and expenses when they are actually paid. It is the most common and easiest method of accounting for your money. A check that you received or that was made available to you before the end of the tax year is considered income constructively received in that year. When you sign and mail the check you are using to pay for a case of paper, it becomes an expense for the year in which you wrote the check.
Operating under the accrual method, income must be reported as earned, not when it has been physically received. Expenses may be used to offset income, even when the actual payment has not yet been made. Under this method, accounts receivable and accounts payable must be maintained in order to record these balances. If you send an invoice to a client for the editing work you completed, you must record the income at that point in time. When you receive an invoice from the indexer you hired to complete a manuscript, that invoice represents an expense at the time of receipt.
The hybrid method offers a combination of cash and accrual systems. Most writing businesses will operate under cash or accrual, but this is another option for you to consider.
© Brigitte A. Thompson, Datamaster Accounting Services, LLC
Author of Bookkeeping Basics for Freelance Writers available on Amazon
The information provided is intended to be general and based on the Federal Tax laws of the United States. As such, it is subject to change. This information is not intended to be used as a substitute for financial or legal advice. Be sure to consult your tax advisor on all tax matters.
More About Brigitte
Brigitte A. Thompson operates an accounting firm in Vermont and is the author of several recordkeeping and tax books. She is a member of the American Institute of Professional Bookkeepers and the Vermont Tax Practitioners Association. She has been in the field since 1985. Brigitte is President of Datamaster Accounting Service, LLC
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