Running your own business can be a daunting but ultimately rewarding task, as you work to cultivate your own creation into hopefully becoming a self-sustaining enterprise. There are many factors that go into running a business, but none of them are more important than accounting. Money is the lifeblood that keeps companies running and it is vital that you properly keep track of your income and expenses, so you are always aware of how much cash your business is earning and spending.
Not everyone is a trained accountant, however, and one of the most daunting decisions for tracking your own expenses is deciding which method will be used to keep your books. If you are unsure of the differences between cash and accrual accounting, the following blog article will look at the pros and cons of both methods. While we will not give a definitive answer on which is better when it comes to cash accounting vs accrual accounting, it will hopefully give you the necessary advice to make your own decision.
Cash and Accrual Accounting
When it comes to cash accounting vs accrual accounting, cash accounting is the more basic of the pair. It simply records money as it goes in and out of the business, creating an easy-to-follow spreadsheet that just focuses on the cash flow. If your business undertakes a job for someone, you do not record the agreed payment for that job until you have been paid. Alternatively, when you need to pay someone, you do not record this debit in your books until you have actually paid them.
- Is a very simple system and easy to understand even if you have no accounting experience. You just need to keep track of your business’ expenses and earnings as they are paid.
- If you operate a small business with customers that mostly pay cash in hand, such as a corner store or a hairdresser, cash accounting will be a good fit for you.
- Easily tells you how much money your business has on hand.
- As cash accounting only tracks money as it is going in and out of your business, it does not keep track of the money you owe or are owed for services that have already taken place. This can lead to payments that you had not planned for messing with your savings.
- By focusing only on the current balance, cash accounting can paint a misleading picture. While your records may show your business has a positive balance, it may not have planned for outstanding payments that could tip your balance into the negative.
Accrual accounting is the more complicated option in the cash accounting vs accrual accounting debate, but it provides its own unique benefits. Accrual accounting records your transactions when they first occur and not when money ultimately changes hands. This way your records showcase who owes you money as well as who you owe, allowing you to plan your finances accordingly. An example of this method would see you giving an invoice to a client and recording the agreed payment in your books, even though you have not been paid yet.
- Accrual accounting is a good fit for companies that do not receive payments straight away. For example, if you are a builder or an architect, you usually do not get paid until some time after the work has been completed and you have provided an invoice. Accrual accounting allows you to keep track of these upcoming payments so you can factor them into your finances.
- If your business deals in contracts or larger sums of money that are too big for cash in hand transactions, accrual accounting is helpful for managing these different expenses and credits.
- Since accrual accounting deals with money you have not sent or received yet, it is more complicated to handle the books as you need to make sure you are properly tracking all outstanding payments to provide an accurate balance.
- Due to its complicated nature, accrual accounting is not recommended for novice bookkeepers. You will want to have a good understanding of the trade to ensure you do not make mistakes, or a professional to handle the books for you.
Which Method Should I Choose?
As you can see there is no right or wrong answer when conducting a cash accounting vs accrual accounting debate, with both options presenting their own strengths and weaknesses. Ultimately, the decision rests with you and your unique situation. If you are a sole trader or operate a small business that receives a lot of cash-in-hand transactions, then the basic nature of cash accounting will suit you. But if you run a company that relies on contracts and hands out invoices to be paid later, then accrual accounting will be a better fit due to its ability to track outstanding payments.
If you are still unsure of which method to undertake or wish to learn more about cash and accrual accounting, book a consultation with us at Taggart & Partners. As accounting professionals, our team can assist you with any queries you may have when it comes to managing your business’ finances. We are happy to handle your finances for you regardless of the method you decide and are here to help you take the hassle out of your managing your books so you can focus your time and energy into other areas of your business.
Get in Touch with Taggart & Partners Today
With years of experience in the accounting industry, Taggart & Partners is here to help you manage your business’ finances and to give you peace of mind. If you are seeking a business advisor, give us a call on (07) 3391 1188 or send an email to us at email@example.com and we will get back to you as soon as possible to get started on bringing out the best of your business. You can also use our online contact form to reach out and inform us of your situation and what you are seeking to achieve.