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  1. #1
    Join Date
    Jun 2005
    Location
    Columbus, Ohio
    Posts
    171

    Accounting Method and Capital Accounts

    Most of us here do things legally, so I have a few questions to my fellow businesspersons:

    Do you use the cash or accrual accounting method? Why do you use that one over the other? If accrual, how do you record invoiced customers (accounts receivable) who do not pay and are suspended/terminated, but still consume at least a portion of their invoiced service?

    I am a member of a multi-member LLC. Is anybody else a member, manager, or employee of a multi-member LLC? Does the LLC elect to be taxed as a corporation or a pass-through partnership? If you are a member of an LLC that is taxed as a partnership, how does the LLC keep the books for the members' capital accounts, and how often are disbursements made?

  2. #2
    Join Date
    Oct 2007
    Location
    Hong Kong
    Posts
    1,248
    Our customers are billed annually, but we prefer to use cash accounting to keep things simple, and because hosting is not our core business. But for larger host it definitely makes sense to use accrual accounting to have a better picture of the operations.

    Invoices which are not paid can be considered delinquent accounts and the amount expensed as a loss.
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  3. #3
    Join Date
    Jul 2003
    Location
    Goleta, CA
    Posts
    5,550
    Accrual accounting is designed to better match expenses with revenue and give you a clearer picture of your operations. It's generally preferred over cash when you have creditors, investors etc.
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  4. #4
    Join Date
    Jun 2001
    Location
    Denver, CO
    Posts
    3,301
    I am part of a multi-member LLC with pass through accounting. We "draw" a salary and it's booked as a guaranteed payment (standard expense). At the end of the year, the accountant give us an option of offsetting some of the guaranteed payment with a disbursement from capital accounts for tax purposes, but that's a paper transaction more than anything else.
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  5. #5
    Join Date
    Oct 2006
    Posts
    76
    Quote Originally Posted by GamePhreak View Post
    Most of us here do things legally, so I have a few questions to my fellow businesspersons:

    Do you use the cash or accrual accounting method? Why do you use that one over the other? If accrual, how do you record invoiced customers (accounts receivable) who do not pay and are suspended/terminated, but still consume at least a portion of their invoiced service?
    Suggest you consult an accountant for trustworthy information on the subject.

    If using accrual basis though, then my (current) understanding is that you will account for the non-received amount as a loss/debit at the date on which the receivable is expected. Similar to the fashion in which refunds are accounted for, if you do issue them. So that on the books, the credit and debit balance each other out. Of course, if they are in different financial years, then you will have an excess revenue one year, and a lowered revenue the next year.

  6. #6
    Join Date
    Mar 2004
    Posts
    550
    We use accrual method, and I think that gives a fairer view of the business, especially with many customers paying in advance. We carry "unearned revenue" on our balance sheet to reflect customers who for example pay for a 1-year term but have only (to date) receive X months of service. The only difficult part here can be with revenue recognition -- we do our books monthly (as required by law in our jurisdiction), so you have to divide out the percent of revenue earned each month based on the term the customer has paid for. There are some tools out there specifically for this purpose to make things easier, or you could just set up the revenue recognition calculations in Excel. We follow IAS accounting standards, but I believe US GAAP also dictates that revenue recognition be done this way as well (percentage of service/product delivered per reporting period).

    Regarding unpaid invoices, those are listed as such in our balance sheet (standard account practice). We have a very low rate of delinquent accounts (below 0.5%) but if you have a higher rate, you can just add a provision for it.

    We bought a company that used the cash method, and it was a real mess trying to figure out the liabilities (unearned revenues). In the due diligence process, we ended up going through all invoices issued in the last year and developing our own schedule based on that. The acquisition price was adjusted accordingly.

    I can't comment on the LLC issue -- we are incorporated and in our jurisdiction, profits are taxed only once and only at the time of distribution (not annually).

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