Cash Versus Accrual Accounting

When referring to accounting methods, we are talking about the ways in which financial records are kept by businesses, which are used to make their financial reports for each quarter, explains Carlos Hank Rhon. You can use both accrual and cash methods for keeping records of financial transactions for business. If you run a small business, it would help you to determine what method you want to take advantage of, factoring in sales volumes, the presence of customer credit, and IRS tax requirements.

Although these records are needed by law, they can also be useful for business owners when it comes to business decisions based on aspects of financial situations, explains Carlos Hank Rhon. The method chosen by small business owners is important because although the technique can be changed at a later date it can be difficult to make the change over. With this in mind small business owners need to really think about which technique most suits their business.

When you use the cash method for accounting records, you will record income and expenses as it is transferred from your accounts in real time – instead of writing down when you made the commitment to spend money, you write down when it actually left your hands. Also, you write down when you actually received money, instead of when you intended to take money in. This makes it possible to delay billing and expedite payments so you do not have to pay income taxes on some of it until the next business year.

You can get a lot of benefits with the cash method; namely, compared to accrual method, it is a far easier to look at, it gives you a much better idea of how your finances are doing, and you do not have to get taxed on certain expenses till the following year. Due to the fact that you are altering the times at which you pay and take in money, though, you might tend to adjust details of how your company is doing financially, which can be misleading. What’s more, accrual methods work harder to show when you actually spend and took in money, notes Carlos Hank Rhon.

The main drawback to the accrual technique is the fact you may be taxed on income before you actually have the money, although this technique offers a far more accurate image of your businesses financial performance over the long term in comparison to the cash technique. Expenses are recorded when they are sustained and revenue is recorded as it is made, rather than when money is handed over. For example, accounts receivable will be included in this method even though you have not yet received the payment.

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