When you run an automotive repair shop, you often purchase parts and pay vendors in different months, as well as provide a service and get payment for it in different months. So, when do you recognize income and expenses?
While you provide a service, you’re also a retailer of replacement parts. I recommend that small retailers use the accrual method of accounting. Let’s talk about what this means and how it can benefit you!
At CSI Accounting & Payroll, we’ve provided monthly accounting and year-round advice to auto repair shops for nearly 60 years. Your industry has been our specialty from the start! That means we’ve answered hundreds of questions like these:
There are two accounting methods: cash basis and accrual.
Cash basis is simple. It just means you count all income and expenses in the month they actually occur. For example, all money that comes in January is January’s income, and all money that goes out in January is January’s expenses.
You’re likely using cash basis if most of your cash flow occurs within a month or if you don’t hold onto these into a new month:
There’s one catch – if you have an inventory and make over $5M in annual sales, you can’t use this method.
Meanwhile, accrual accounting is a bit more complicated. With this method, you count income and expenses for the month in which the work was done or the cost was incurred – not when the money moves in or out of your bank account.
This makes sense for situations when your cash flow doesn’t occur in one month or if you have a large dollar amount in any of the following:
While you may still be able to use cash basis if you have a lot of inventory, you must use accrual if you also make over $5M in annual sales.
For an accrual example, you may provide a service in January and get paid for it in another month – but it’s shown in your books as January income. Then, if you incur an expense in January but pay it in another month, it’s shown in your books as a January expense. For inventory, you may bring in a part and pay for it in another month, but the expense of the inventory goes for the month you sold it – not the month you purchased it.
As I mentioned in the introduction, as an auto repair shop owner, you provide a service, but you’re also a retailer of sorts. Services often use cash basis accounting, but I recommend that retailers use the accrual method. That includes auto repair shops!
Even though you’re not required to use the accrual method, it’s more accurate if you do. This is because of the “gaps” – whether they’re between when you buy and sell parts, when you provide and get paid for services, or when you buy and pay for inventory.
Under cash basis accounting, these “gaps” cause inaccurate monthly or annual Profit and Loss Statements because your profit margins will not be correct. Months range from 28 to 31 days, so if you only record income and expenses when money changes hands, things can look uneven from month to month.
Luckily, with accrual accounting, this is fixed! Enjoy the benefits of accurate profit margins, monthly Profit and Loss Statements, and annual Profit and Loss Statements.
Want to hear how monthly accounting can stretch those benefits even more?
Tracking accurate profit margins each month means you can make adjustments throughout the year. Don’t wait until tax season to make informed decisions – take action whenever it’s needed.
A monthly accountant with experience in the auto repair industry can advise on raising pricing, changing your labor rate, and much more. (Check out our free matrix pricing templates to start thinking about changes for your shop.)
Expert advice, monthly bookkeeping and financial statements, year-round tax strategy, and annual taxes are right around the corner. Consider monthly accounting!
Now that you know the differences between accrual and cash basis, why accrual makes more sense for auto repair shops, and how a monthly accountant can boost accrual benefits, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
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