23 Mar What Is Cash vs. Accrual Based Accounting?
Many small businesses start off using the cash based accounting method which makes sense because it is what we all know and it is easy to do. However, as a business continues to grow, small business owners realize they need to more accurately track all their revenues and expenses. While cash based accounting does a great job of managing day-to-day cash flow, it does not accurately match business income with their associated expenses. Here is the skinny on cash vs. accrual based accounting.
Cash based accounting
Cash based accounting is similar to how we all operate our personal finances. You record all transactions when cash actually changes hands. For instance your employer pays you and the money appears in your account or you pay your electric bill and the money is taken out of your account.
Accrual based accounting
Accrual based accounting is when you record the transaction at the point when the income is earned (not when you receive the actual payment). So for instance, if you have a small business and you perform work for a client in January but don’t receive the payment until February, you still record the income in the month of January since that is when the income was earned and not when it was received.
For example, if you purchase products in September for $10,000 that you are going to resell but don’t sell them until October for $15,000, you will see a loss of $10,000 in September and profit of $15,000 in October. However, the reality is for that expense and income there was a $5,000 profit. Accrual based accounting captures that correct snapshot whereas cash based accounting does not.
To learn more about cash and accrual based accounting, read the IRS descriptions here.
If you are concerned about maintaining your cash flow after switching to the accrual based accounting method, check out this post on 7 Tips For Better Managing Your Business Cash Flow.
Need some help with your accounting practices? By working with Accounting and Business Partners, you will not only be able to simplify your acounting process, you will also gain the freedom to concentrate on other areas – like generating new customers and growing your business. To learn more about how we can help your business thrive, call us at 727.828.9945 for more information.
About Accounting & Business Partners
Accounting & Business Partners is a CPA firm with an accurate, consistent and timely bookkeeping, payroll and tax departments. We believe that success lies in numbers. However, the drive behind the numbers is what truly matters. That’s why we look beyond the financial statements.