There isn't one single recommended bookkeeping method for salons. The best bookkeeping method for your salon depends on the size and nature of your business. Smaller salons with less complex operations may prefer to operate on a cash basis using a single entry bookkeeping method. However, larger salons that stock inventory and perform more transactions may want to invest in sophisticated accounting software and operate on an accrual basis.
Cash vs. Accrual
Salons have the option of performing bookkeeping on a cash or an accrual basis. Accrual accounting requires the salon to record a transaction when a revenue or expense occurs, regardless of whether or not cash is involved. Cash accounting means only recording a transaction when cash flows in or out of the salon. Cash accounting is usually more intuitive and easier for bookkeepers without a background in accounting. However, accrual accounting paints a more accurate picture of the financial state of the business. If your salon stocks products and resells them to customers, you can only use cash accounting if your average annual gross receipts were under $1 million for the last three tax years.
Manual vs. Computerized
Small salons with only a few stylists may prefer to maintain manual records. Manual bookkeeping works best if your salon doesn't have many transactions, operations aren't very complex, and your stylists are classified as employees. However, if your salon stylists are independent contractors, accounting software may make it easier to track their individual income and generate 1099 forms at the end of the year. Salons that stock products may want to take advantage of accounting software with an inventory module. An inventory module makes it easy to compare the cost of products with sales results to identify profitable products and sales trends.
Single Entry vs. Double Entry
If you're leaning toward a cash basis bookkeeping method, you can also choose to handle bookkeeping using the single entry method. In single entry bookkeeping, each transaction affects one account compared to two accounts in double entry accounting. For example, say a customer paid $60 for hair styling. Using the single entry method, you would simply debit cash for $60. In double entry accounting, you would debit cash for $60 and credit the service revenue account for $60. Single entry may be easier to perform, but it's harder to identify mistakes and errors compared to the double entry method.
Consider other aspects of salon operations and their financial complexity. If the salon has a complex method for billing and paying stylists, you may be better off with a more sophisticated bookkeeping method that can help you keep the numbers straight. For example, it's not too difficult to bill and record a flat monthly fee for stylist chair rental. However, if you charge a commission on stylist revenue or other fees based on income, it may be worth it to purchase more advanced accounting software.