How to do accounting for an LLC
/Limited liability company (LLC) accounting is similar to the record keeping required for a normal corporation. It is necessary to create a chart of accounts and maintain a general ledger, in which all accounting transactions are recorded. Examples of transactions that an LLC might record include the following:
Billing a customer
Receipt of cash from a customer
Record a billing from a supplier
Pay a supplier
Record a fixed asset
Pay compensation to employees
Write off assets
Record the receipt or payment of a loan
Related AccountingTools Courses
Essentials of Limited Liability Companies
Accounting Methods for an LLC
One can choose to use either the accrual basis or cash basis of accounting when initially setting up the accounting system for an LLC. Under the accrual basis, revenue is recognized when earned and expenses when incurred. Under the cash basis, revenue is recognized when cash is received and expenses when bills are paid. The accrual basis involves more complex accounting, but results in more accurate financial statements. The cash basis is relatively easy to use, and so is preferred when the accounting staff is small and less well trained. Also, by using the cash basis, it is more likely that a business will have sufficient cash in hand when taxes are due.
Tax Issues for an LLC
The key, unique accounting issue related to an LLC is the payment of income taxes. Income is supposed to flow through to the owners of an LLC (as is the case with a partnership), so the entity itself does not pay taxes. Profits and losses are allocated to the owners based on the relative proportions of their ownership interests in the LLC. This arrangement makes an LLC a pass-through entity.
This also means that the LLC does not record any tax credits, since there is no tax liability to offset them.