Income Claim Year

[kumaraja]

Hi All,

I am a small business owner. We do IT consulting and bill our customer at the end of the month. Typically we get paid 30 days post issue of invoice. My question relates to claiming of income in a calendar year. So for e.g. if we bill our customer for Dec project work on 1st of Jan (next year) and get paid 1st week of Feb do we claim the income billed in Jan for Dec work in the previous year earnings or the new year income? Our financial accounting year for bookkeeping is Jan - Dec.

thank you for your feedback!

Ajay

[vangogh]

You have the choice of doing either. It's two different methods of accounting, cash method and accrual method (http://www.paychex.com/articles/finance/cash-vs-accrual-accounting). The cash method is much easier to deal with. This is the method where you report money on the day it you get paid or the day you spend to buy something. In your example you'd claim the income in February, since that's when you were paid. I think it's what most people use. The reason you might choose one over the other is to move some revenue to a year where it benefits you more for tax purposes.

I could be wrong, but once you start one method, it's a pain to switch to the other, but don't hold me to that.

[TAAccounting]

Kumaraja,

I agree with Vangogh. It really depends on what method you elected to have your company under -- 99.9% of the time, it will be accrual method of accounting.

This doesn't mean you can't have some wiggle room when it comes to year-end closing and adjustment. But for my professional recommendation; I would suggest one of the following -- depending upon your tax situation.

1. If you ended the year on a strong note and could possibly owe some taxes
-- Then push the invoices off for a day and recognize them in 2015 instead. This will help with the tax burden

2. If you are ending the year on a bad note
-- Then I suggest you recognize the invoice in 2014 to off-set some of your losses.

3. If you are needing a good tax return in order to apply for a loan
-- Then definitely recognize it in 2014 since that is what the banks/lenders will all want to see

I hope this helps! Let me know if I can assist you any.

[Freelancier]

IANAL, but I'm pretty sure in this case, that even if you were using accrual method, you don't recognize the revenue until you send the invoice, not when you do the work. So it's this year either way, since the invoice wasn't sent until this year. If you had sent it on Dec 31, that would have been last year for accrual and whenever the money shows up for cash accounting.

The general rule:

Revenues from rendering services are recognized when services are completed and billed.