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How to Calculate Expense Using Cash Basis Accounting

Original post by Tom Chmielewski of Demand Media

Keeping track of business expenses is essential, but your first decision is whether to use a cash or accrual basis.

Many small businesses, particularly sole proprietorships, handle their accounting on a cash basis rather than an accrual basis. Accrual accounting, which records expenses when incurred and income when earned rather than when cash actually changes hands, is more complicated to handle, but can give a truer picture of a company’s profit and loss per month. Cash accounting is based on when bills are paid and payments received. Besides the advantage of simplicity, it gives a clearer picture of cash flow.

Contents

Step 1

Set up accounts that record the specific types of expenses you will incur. Business accounting programs generally provide a basic list of expense accounts as a starting point, such as advertising, office supplies, vendor services, office rent, taxes, insurance and professional fees. Add accounts that relate specifically to your business.

Step 2

Create subaccounts to keep better track of expenses for specific items. Under office expenses, for example, you can create a subaccount for printer’s ink so that at the end of the year you have a figure you can budget for the following year or adjust if you buy a new printer that uses cheaper ink.

Step 3

Record expenses as you pay them, including vendor payments, debit card payments, payroll, taxes and miscellaneous expenses. If you run a business accounting program to write your checks, the program will generally require you to enter the appropriate account the payment is attributed to before recording the payment, simplifying your bookkeeping. Run monthly reports on expenses and income to keep track of your business cash flow.


                   

Tips & Warnings

  • While many small businesses use a dedicated business accounting program, you can use a basic spreadsheet program or even a pencil and ledger book. But the Internal Revenue Service now accepts electronic records from business accounting programs if you’re ever audited, reducing the need to come up with boxes of receipts to verify your expenses.

References

About the Author

Tom Chmielewski is a longtime journalist with experience in newspapers, magazines and the Internet. With his company TEC Publishing, he has published magazines and an award-winning multimedia eBook, "Celebration at the Sarayi." Chmielewski's design skills include expertise in Adobe Creative Suite's InDesign and Photoshop. He holds a Bachelor of Arts in English from Western Michigan University.

Photo Credits

  • John Foxx/Stockbyte/Getty Images


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