What do I do with earnings that don't come until the next calendar year?

by Karrie McCan
(Carmel, IN)

I am a sole proprieter floral business. This only my first full year of operation. I had a big job in December so the supplies and flowers were bought then, but the company pays 44 days behind. So that income is in 2018. How do i report that? Income in jan? Expenses in december? Or should I just consider it payment for December?


I also buy alot of floral and seasonal supplies for the next year, but I just count them as expenses for thr current year. Is that wrong? Should I consider them expenses when I actually use them?


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Hi Karrie!

I'm assuming, as a small sole proprietor, that you're using the Cash Basis of Accounting. This means that you recognize income when you receive the cash, and you post an expense when you spend the cash.

Like this...

If you purchase your supplies in December by paying at the point of purchase with a credit card or check, then you would show the expense in December. If you purchase your supplies in December but the vendor bills you, and you write them a check in January, then you would show the expense in January.

Same with revenue. If you make the sale in December but don't receive the money until January, show it then.

However...just for your knowledge...

If you were using the Accrual Method of Accounting, you would post the expense when you purchase your supplies, and post revenue when you give the customer the product. It has nothing to do when cash changes hands. The purpose of the Accrual Method is a better "matching" of revenue and expenses.

But most small businesses use the Cash Method, and that's just fine. Just be consistent.

Hope that helps!

Kathy

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