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The two basic ways to account for your income and expenses are the cash method and the accrual method. Most eBay businesses use the cash method, which is simple and common-sensical.

The cash method. With this method, you count income when you actually receive it and expenses when you actually pay them. For example, if you complete a sale in December but don’t get paid until January, you record the income in January. Similarly, if you buy a digital camera for your eBay business on credit, you record the expense not when you charge the camera and take it home, but when you pay the bill. (The IRS won’t let you manipulate your income by, for example, not depositing a seller's check until the next year; you must report income when it becomes available to you, not when you actually decide to deal with it.)

The accrual method. Under the accrual method, you record income as you earn it and expenses as you incur them. For example, if you complete a sale in December, that’s when you record the income you expect to receive from it, no matter when the buyer actually gets around to paying you. (If the seller never pays, you can eventually deduct the money as a bad debt.) And if you charge some office furniture, you record the expense on the day of purchase, not when you pay the bill.

As you can see, the cash method is much easier to use; most of us deal with our personal finances this way, so it’s a system we’re familiar with. It also gives you a clear picture of your actual cash on hand at any point in time.

As long as your eBay business makes less than $1 million a year, you may choose whichever method seems right for your business. (If your eBay business made more than $1 million in any of the last three years, you might have to use the accrual method — but if your business is pulling in a million dollars, we hope you're getting some professional tax and accounting advice.) For more information, check out IRS Publication 334, Tax Guide for Small Business, and IRS Publication 538, Accounting Periods and Methods.

by: , Attorney

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