There are two accounting methods for calculating income: the accrual basis and the cash basis. Many sole proprietors and individuals who are self-employed by IRS standards use the cash basis because it is the easiest method to account for business income and expenses. Under the cash method, revenue is recorded when it is received, and expenses are recorded when they are paid. In many cases, a cash-basis method also synchronizes with a well-kept bank register.
Calculate the total of all sources of business revenue you receive from customers or clients. Record payments in the period you receive them, not when you deposit the funds in the bank. For example, if you receive a payment from a client in December, you must report the income in December, even if you actually deposit the payment with your bank in January.
Calculate the total of all the business expenses you pay during the same period you calculate your income for. You may perform the calculations on a daily, monthly, quarterly or annual basis. Under the cash-basis method, you may not record any expenses that you have been billed for but have not paid.
Subtract your total cash-basis expenses from your cash-basis income. The result is your net income using the cash -basis accounting method.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.