Business owners are responsible for making many important decisions every day, and one of the first crucial decisions you will make is which accounting method to use. The two methods that are the most different are cash-basis and accrual accounting, so you should be aware of the pros and cons of each. Continue reading for a comparison of accrual and cash-basis accounting to determine which is best for your business.
Cash-basis accounting is the simplest accounting method, and many businesses use it for bookkeeping. This method only lets you use cash accounts so that you can record cash, expenses, and income, but you can’t track long-term liabilities, loans, or inventory. With cash-basis, you record income when you receive it and only report expenses when you pay them.
A few advantages of cash-basis accounting are that the method is less expensive than others, is simple and easy to use, requires less information to track, and is ideal for small business owners. There are, of course, cons to this method as well, including more restrictions on which businesses can use it, fewer businesses that can use it as they grow, and fewer available accounts.
Accrual accounting is very different from cash-basis, as it is the most complex option out of all the accounting methods. It requires some basic accounting knowledge, as business owners will use more advanced accounts, such as accounts payable, current assets, and long term liabilities. You will need to record income when your transaction takes place, with or without the transfer of money, and you must record expenses when you are billed.
A few advantages of the accrual accounting method includes being able to anticipate future income and expenses, projecting long-term profitability, accessing various types of accounts for transactions, and helping you make smarter financial plans. Once again, there are also a few cons to this method, including that it is more complex than other methods and requires some accounting knowledge.
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