Need some help about accounting Revenue, Payable, Receivable?

Question

I am doing some small business, which is strictly wholesale. In Dec2006, I sold out my product to my customers and invoiced them in Dec 2006. But I receive actual payment some in last December and the balance in January.
Also the invoices I received from my supplier were all dated in Oct2006. I paid my supplier, some in December and the balance in Jan too.
If my fiscal date ends on Dec31,2006, for money receivable and payable after Dec31,2006, should I roll the payment received from my customer and payment I made to my supplier after Dec31,2006 into fiscal year 2007 or count this money in fiscal year 2006?

Thanks for answering.

Thanks for all answers. I am in Ontario Canada. Does Canada have these method - the cash or accrual method for accounting?

Thanks.

Answer 1

You should record everything as incurred in 2006 (Payable/Expense/Revenue/Receivable). The only thing you should carry forward to 2007 is the balance of unpaid receivable and the unpaid payable. You incurred the cost and and earned the revenue in 2006 and you received partial payment and gave partial payment in 2006, so you should keep that in 2006. Just keep unpaid balances in 2007.

Answer 2

It depends on whether you use the cash or accrual method of accounting. Here's how it works in the U.S. (though I understand it varies slightly from country to country):

The cash method means you report the income when received and the expense when paid. In other words, when the money changes hands. So under the cash method, you would report the portion of income received in 2007 as 2007 income, not 2006 income. Likewise if you received product in 2006 but didn't pay for it until 2007, it would be recorded as a 2007 transaction.

The accrual method means you record the income when earned, in other words when the item was sold. So if you sold an item in 2006, even though you didn't collect all of the money in 2006, it is still all 2006 income. Likewise if you incurred an expense (e.g. received supplies or inventory) in 2006 and didn't pay for it until 2007, you still record the expense in 2006, the year the expense was incurred (items received).

The two methods are both acceptable accounting practices, but tax laws also cover their use. Under U.S. tax laws, we can choose which system to use on our first tax return, we don't have to declare it in advance. Large (multi-million dollar) businesses are required to use the accrual method, but small businesses can choose which one is more advantageous. However, once a method is chosen, it is difficult to change it.

Hope this helps.

Answer 3

As elbac explained the invoice date is paramount and all the trading would be recorded in 2006.

You do not have the choice of accounting method. The cash basis was done away with a while ago.

It is true that some small (and largely cash based) businesses still use the cash basis and HMRC do not complain. However, if it turned out that the tax payable was reduced by doing this they would then be in trouble.

Answer 4

You have to elect the accounting method that you are using which will determine what you do. If you elect cash, then actual payments and receipts are used, if you elect accrual then date of invoices will be what determines the time you report the income.