Small businesses must make the decision which accounting method to follow, whether it is the accrual or cash method. Both have advantages and disadvantages and provide you with insight about your company’s cash flow.
Experts on tax accounting services list the following differences and which method to use, and when it is most effective.
With this method, you record the revenue that comes in once your customers pay and once you have actual cash and not receivables. You also do the same when you list down expenses, you write the check or pay in cash, and the money is no longer in your account. This is a simple explanation of cash accounting, which most people use when they balance their check books. You can also do the same for your company as this approach monitors the inflows and outflows of money.
The cash method provides you with an accurate way to determine how much actual cash you have. This may be the simplest form of accounting, but it may mislead you about the profitability of your business. Your books may show high sales and revenue, but in reality, sales might be slow and the high numbers are because of customers paying their credit on that month.
The Accrual Accounting Method
With accrual accounting, on the other hand, you record the revenues and expenses on the date they are due. For example, you list a sale down as income on the date your business makes the sale. For expenses, you record these the day you incur them and not when you pay for it on its due date.
Many experts mention that this approach gives you a better look at your finances because it accounts for the cash that enters and leaves your company. However, this method may keep you in the dark about how much money you have on hand. The books may show huge sales, but it is due to receivables that customers have yet to pay.
These two accounting methods are effective, but they both have their pros and cons. Determine if the advantages outweigh the disadvantages before using either the accrual or cash method.