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Accounting Types: Cash vs. Accrual

Accounting Types: Cash vs. Accrual

Ensuring that your business thrives involves plenty of accounting work.

Ensuring that your business thrives involves plenty of accounting work. For example, you might not have enough staffers to fill out an HR division. So let’s suppose that you (or an immediate subordinate or business partner) serves as the payroll overseer. You’ll have to decide between cash accounting and its accrual counterpart. Since accrual accounting is less well-known, we can begin our discussion there. 

A Glimpse at Accrual Accounting 

Accrual accounting is actually quite simple: whenever goods or services are delivered you can consider the invoice to be usable revenue. This principle holds true even if you don’t receive payment right away. Likewise, the expenses you incur should appear on your balance sheet around the same time as you receive the other end of the transaction (goods and services) even if you don’t pay for them immediately. The entire process can be confusing, especially for fledgling business owners who don’t have a very wide network of accountants and other logistical support professionals just yet

A Look at Cash Accounting 

So now we can examine the basis of cash accounting. Although it’s easy to assume that this form of accounting can only rely on physical money, that’s a common misconception. In reality, it hinges on how the funds actually move. Put more simply, you receive income once invoices are paid, and so forth. When you pay your bills, that counts as an expense; the money is only valid once it arrives in your bank account or departs for someone else’s.   

Your Takeaways

We understand that accounting can be a difficult task to accomplish. That’s why we consider our expertise to be invaluable, and it’s why so many of our clients can benefit from our assistance. Ultimately, the type of accounting management system you choose will have a large impact on paying taxes. With accrual accounting active, you could potentially be taxed on money you don’t have on hand yet. On the other hand, if you’ve chosen to use cash accounting, then this is less of a concern. After all, the taxes are only applied after the money is yours. Please note that larger companies are held to stricter standards by the IRS than small agencies – if you bring in over $1 million yearly, then the IRS stipulates that you must use accrual accounting methods. 

trust the professionals at the harding group

Unlike other accounting firms, The Harding Group, located in Annapolis, MD, will never charge you for emails or phone calls and will strive for open communication with our clients. Whether you are interested in business advising, tax preparation, bookkeeping and accounting, payroll services, Training + support for QuickBooks, or retirement planning, we have the expertise and years of experience to help. We serve clients in Annapolis, Anne Arundel County, Baltimore, Severna Park, and Columbia. If you are ready to take the stress out of taxes, contact us online or give us a call at (410) 573-9991 for a free consultation. For more tax tips, follow us on Facebook, Twitter, YouTube, and LinkedIn.


This entry was posted on Friday, November 13th, 2020 at 6:36 pm. Both comments and pings are currently closed.

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