| Business Deductions | | | | gap. |
| One of the things I try to remind people of is to always | | | | They say, "I'll pay you October 2nd but I'll pay you both |
| be thinking. It's not only the obvious expenses of your | | | | months." You say that's fine. On October 2nd you get |
| business, there are a lot of other business deductions | | | | a $2,000 check. In the cash basis accounting you |
| you should be thinking about. Obviously if you spend | | | | would not book any income for September. You |
| $100 to replace a window that's a business expense - | | | | would book $2,000 in October. That is true cash |
| that's as clear as day. | | | | accounting. |
| | | | Accrual would be the opposite. You would book it in |
| If you use part of your home office or your home to | | | | September because even though he didn't pay you |
| do your accounting to run your business, you can | | | | then you earned it in September. You earned it in |
| deduct a portion of your home expenses. These are | | | | October. So you would show $1,000 in September and |
| things that are not that intuitive. | | | | $1,000 in October, even though you got paid $2,000 in |
| Any sort of educational material - books and things like | | | | October. |
| that - are deductible. If you have to wear specialized | | | | The accrual accounting kind of smooths things out. In |
| clothing - work clothes, boots or anything like that as | | | | cash accounting things only happen when cash hits |
| part of your business - they're all deductible. Think | | | | your accounts. |
| outside the box a little bit in terms of additional | | | | Expenses are really where accrual accounting really |
| expenses that maybe are not quite so obvious to you, | | | | becomes the preferred method. Things like real estate |
| but they are business expenses and really should be | | | | taxes maybe you pay once a year. Let's say your |
| deducted. | | | | taxes are $1,200. In the accrual based accounting you |
| Cash Versus Accrual | | | | would be booking every single month $100 real estate |
| We talked about the income statement. One of things I | | | | taxes, even though you don't pay it until the end of the |
| want to talk about is what I call cash versus accrual. | | | | year. You would still be booking that expense $100 |
| There are two ways to do any real financial | | | | each month. |
| accounting. You can do it on a cash basis or on an | | | | On a cash basis you would book nothing all year and |
| accrual basis. I'll explain both of these. | | | | then on the month you paid the $1,200 you would book |
| A cash basis is you only book either an expense or an | | | | $1,200. The weakness of cash account is it does |
| income when the cash is received. For example if your | | | | show some variability and accrual account will smooth |
| rent is $1,000 and you received $1,000 on Sept. 3rd | | | | things out. Either one is fine for your typical landlord. |
| you would book an income of $1,000 for September. | | | | The only thing I recommend here is do not go back |
| That would be simple. | | | | and forth. I'm speaking from experience. I've done a |
| Then October comes along. The tenant pays you | | | | little bit of this. I'd use a little bit of cash, I'd use a little bit |
| $1,000 in October and so you would book $1,000 in | | | | of accrual - sometimes I'd go back and forth a little bit. |
| October. It's very simple. | | | | I really recommend that you pick one or the other and |
| However, let's say your tenant for some odd reason - | | | | stick with it. When you go to do your tax returns you |
| hopefully it doesn't happen - doesn't pay you in | | | | can use either one. You just have to declare it when |
| September. They have a problem, maybe the checks | | | | you do your tax returns. If you're going to pick one, |
| got delayed, a new job or whatever and they have a | | | | stick with it. That's really the important feature here. |