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It really depends on what your accountant advises. Generally speaking, most of my clients in the past have taken the expense on a credit card when it occured. Another factor may be how you have set up your accounting procedures, and how your General Ledger is configured.
You may also want to check in with Luckiest on this site. He appears to have a good grasp as to what is going on in the accounting arena. He is also familiar with Quickbooks and if I remember, is a Quickbooks consultant and also a SCORE advisor.
Which leads to: what accounting program/system are you using?
No matter what you do, do not loose any of the receipts and make sure not to include any personal purchases at the same time.
Best of luck in your venture.
Retires MS Great Plains Sales Manager
I do the accounting myself. My wife and her mother run the business, a child day care. It only makes 50,000 per year, so we realy have to cut expenses. I had an accountant set everything up the fist year and I have been doing them myself using Turbo Tax the last 12 years. We just recently, last november got the charge card, so I'm not sure how to enter the expenses into the deductions portion of the tax forms. Thank you for your answer.
While the distinctions between cash basis and accrual basis would seem to be clear, the reality is that few businesses use strictly cash basis accounting and never account for any liabilities. Most businesses using cash basis accounting for tax purposes use what is called modified cash basis accounting. It's cash basis accounting with a couple of exceptions for liabilities that are allowable under IRS.
The first exception is for credit card purchases. Under IRS rules, even if you are using cash basis accounting, you are allowed to take deductions for business credit card purchases before you've paid the credit card bill. Therefore, you'd be denying yourself some important deductions if you didn't account for the credit card expenses.
Another exception is in the case of asset purchases. If you borrow money to buy equipment or real estate for your business, you are entitled to take depreciation deductions on those assets even though you're using cash basis accounting. You also take interest deductions to the extent you pay interest.
Under cash basis rules, you cannot take deductions for trade payables you haven't paid. You also don't have to account for income you may have earned but haven't received cash payment from your customer.
If you want to do more research on this, I would look up rules on modified cash basis accounting and follow those rules consistently. The important thing is consistency and reporting transactions consistently year to year.
Thank you for the answer. I have been doing the other practices you mentioned.
Sage, Great answer to the distinctions between cash basis and accrual basis.
You are so right The important thing is consistency and reporting transactions consistently
year to year.
In a cash basis accounting, you recognize the expense when you pay it. As far as what category to put it under, wouldn't that depend on what the item was that you purchased (i.e., a Staples charge of envelopes or notespads would go under office supplies)?
One has to picture a purchase as whether it creates an obligation or not. If you charge a purchase on a credit card you have entered a contractual obligation to pay the credit card company. Also, if you buy a truck or piece of equipment that has an agreement or contract attached, it is as if you have spent cash, even though you have not made any payments yet.
Richard Duncan, CPA
Certified Quickbooks ProAdvisor
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We use a cash basis for our accounting bais. We recently opened a buisness credit card, and I'm not sure how to account for the costs when doing accounting and filing taxes. Do I take the expense when we charge something or when we actually pay the credit card. If it's with the payment which catagory do i put it under if there are purchases for various categories?