Business Accounting – Cash or Accrual: What is the Right Method for Your Small Business?
Posted On: 29/06/21 - 0

Business Accounting – What You Need to Know

Every business, whether small or large, needs to manage its accounts to keep track of cash flow. There are two types of business accounting that are known and opted for widely – cash accounting and accrual accounting. Business owners opt for one over the other according to their needs. Business accounting is important as it matters in tax filing and bookkeeping and putting the income and expenses on the financial statement. So here we explain an example if you are a small business owner and what may be a viable accounting option for your business..

Cash Accounting Advantages

Cash accounting is the most common accounting method used by small businesses. In this process, the entries are done according to the cash flow in an organization. Your income will be recorded when you receive the actual fee amount from the customer and your expenses will be recorded when you pay for the inventory you have bought.

Easy Bookkeeping

You only need to enter the income when receiving and expenses when you are paying. Adding bills is important for business, but for cash accounts, it is not necessary.

Tracking Cash Flow

It is easy to track cash flow in cash accounting. So, your cash accounting will ultimately appear on your cash financial statement. Cash accounting records your bank transfers and checks transactions and payments of credit cards.

Disadvantages

Tracking Monthly Profit

It is possible that you may forget to pay your monthly rent for the business in the month of September. Then you pay the monthly rent of September in October. Which means there won’t be any entry of the rent in the month of September.

Separate Account Maintenance

You have to keep a different account for the bills you have received and sent (Accrual accounting). You can’t keep the records of bills as you are only recording the cash flow.

Accrual Accounting

Accrual accounting is mostly used by large business firms. Incomes and expenses are recorded in accrual when incomes are earned and expenses are incurred. They are recorded on the basis of bills.

Advantages

Tracking Monthly Profit

You can easily track your monthly profit in accrual accounting. You are recording your bills every month, so you will know which are the least and most profitable months.

Helps Presenting to Lenders and Investors

Lenders and investors are keen to know your monthly profitability. It gives them a clear view of your monthly profitability when using accrual accounting.

Disadvantages

Detecting Cash Flow

Cash flow is difficult to detect in accrual accounting. You are recording on the basis of bills, so you won’t have the records of when you actually paid or received the amount.

Now that you know the advantages and disadvantages of both accounting options, you can choose what is the best option for your small business. If you have any questions regarding this, or any other business related question, please call Cheryl @ 780-482-7297.

12203-107 Avenue.
Edmonton, Alberta.
T5M 1Y9

Call us:
780.482.7297

cheryl@padgettnw.com