In the days before accounting programs that easily accommodate both versions, you used to have to choose between the two. Now that’s no longer necessary but it still pays to know the difference between the two.
It’s all about timing. How you are recording and when you are getting paid.
Cash-based accounting means what it says, nothing is recorded until cash actually exchanges hands. When pay outs are made and when invoices are paid, you hit the books and record the transactions. What are the pros?
Accrual based accounting requires a more meticulously devised system. When using this system, you record sales and payments when the deal is made. While more complicated, this system also shows you a more long-term cross-section. What are the pros?
When determining which system best suits your business, consider three things:
CON’s of Cash? This system creates difficulty when tracking and planning - creating challenges in matching revenue to money-earned.
CON’s of Accrual? This system makes it more challenging to track actual cash flow. Although accounting software can now take a lot of these problems away.
Most widely recommended for small businesses is cash-based accounting and you can justify the switch once business begins to take shape.
Of course, the best thing to make sure you use the best system for your business is to chat with us!