As a record label owner you should decide whether the record company is going to be using cash basis or accrual accounting method to keep track of all transactions.
If you have no idea about the difference between cash basis and accrual accounting we will do our best to explain the difference between these two accounting methods.
Now cash basis accounting means you only record the money you have received in your books. For example, if your record label manufactures say 10 000 CDs or vinyl records, and in that same process you manage to sell 5 000 records. You would therefore only show in your books that you have sold 5 000 records.
On the other hand, with accrual accounting if your record company manufactures 10 000 CDs or vinyl records. You will record in your books that you have sold 10 000 CDs even though you haven’t received the money.
NOTE: With cash basis accounting you only record transactions when you receive money or when you pay for expenses but with accrual accounting you record transactions when they take place without you actually receiving the money you are owed or the expenses you incur.
The Advantages of Cash Basis Accounting When Starting A Record Label.
One of the main benefits of choosing cash basis accounting over accrual accounting is that cash basis accounting is a very simple accounting method that keeps track of your business cash flow.
In addition cash basis accounting is best suited for small businesses meaning if you are just getting started in your day-to-day running of your record label cash basis accounting will be capable of handling your transactions in cash.
The other advantages of cash basis accounting is that it immediately captures the amount of money your record label has in the bank account and the amount of money that is owed to the record label.
The Advantages of Accrual Accounting When Starting A Record Label.
Accrual accounting is very complicated method of accounting for a record label owner who has absolutely no clue about Generally Accepted Accounting Principles to begin with.
Therefore, it is certainly a better solution to hire a certified accountant to do your books if want your record label to use the accrual accounting method.
The accrual accounting method is best suited for large business that don’t get paid straight away when transactions occur and is capable of capturing money owed to other financial institutions and the money that you are going to be paid.
NOTE: If your record label is dealing with complicated contracts and large amounts of money then it would be in your best interest to implement accrual accounting.
- What is a Record Label?
- How to Start A Record Label in South Africa
- Code of Ethics When Running a Record Label
- How Music Publishing Works in South Africa