Which method should you use to manage your books, and which one is best suited to your business? Understand the differences between cash and accrual accounting, and the pros and cons of each.
Here's a quick guide to help you understand cash and accrual accounting to help you decided which method is right for your business.
Cash Accounting
Cash accounting tracks the actual money coming in and out of your business.
In cash accounting, when you:
get an invoice for something – you don't record the cost in your books until you've paid the invoice
send an invoice to a customer – you don't record the sale in your books until you get their payment.
For example, if you send an invoice on Tuesday, and don't get payment in your account until Thursday, you record the income under Thursday's date in your books.
Pros and Cons of Cash Accounting
Cash accounting:
is a simple system that keeps track of your business cash flow
suits smaller businesses if you mostly have cash transactions (for example, a hairdresser or grocery store)
gives you a picture of how much money you have in your till and your bank accounts.
However, it doesn't show money that is owed to you or money you owe to others.
Accrual Accounting
If you use accrual accounting, you record expenses and sales when they take place, instead of when cash changes hands. This way of accounting shows the amounts you owe to people and the amounts owing to you.
For example, if you're a builder and send an invoice for a project you've completed, you record the sale in your books even though you haven't been paid yet.
Pros and Cons of Accrual Accounting
Accrual accounting:
is more complicated than cash accounting
suits businesses that don't get paid straight away (for example, architects who provide a service then invoice for it later)
tracks your true financial position by showing money owed to you and money you owe others
is helpful if you deal with lots of contracts or large amounts of money.
Accrual accounting is more complicated than cash accounting so you'll need an in-depth understanding of bookkeeping methods or a professional to help you out.
Choosing a Method
To work out which method best suits your business, think about:
the size of your business
how complicated your business transactions and processes are
whether you have the resources to manage accrual accounting
whether using an electronic system will make a difference.
If you aren't sure, give Jess at Anytime Assist Bookkeeping a call.
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