Indie authors should use cash basis accounting

The two main methods of business accounting are cash basis and accrual.

In cash basis accounting, revenues are matched up to expenses when the payment is processed. So, if you provide a press release writing service as part of your indie author business, you would record the money due from your client only when the payment actually is received. Small businesses, especially sole proprietors operating out of their home, primarily use cash accounting, as it gives the most accurate picture of the actual amount of cash they have on hand.

Accrual accounting records the revenue when the transaction is agreed upon, even though no payment has been received for delivery of services. Likewise, once you receive a bill, it immediately is listed as an expense even though you may not have paid it. Corporations primarily use this method; in fact, in the United States, any corporation making more than $5 million a year has to use it. This method is preferred for corporations because it gives a current and accurate picture of a company’s financial condition. It’s also the only way some corporations can operate; for example, if you sell a product on credit, cash basis accounting provides no way to record future payments from a customer but accrual accounting does.

As an indie author with limited expenses and a small amount of revenue that isn’t garnered through credit, you want to use simple, straightforward cash basis accounting. Once you expand from solely writing to offering services or products that can be paid for in installments, you’ll want to switch to accrual accounting.