Cash Vs. Accrual Accounting

Cash and accrual accounting are like sibling rivals in the accounting realm, one clashes with the other, but you can definitely see the resemblance. The main difference between accrual and cash basis accounting lies in the timing of when revenue and expenses are recognized. Even if you don’t handle your own financial reporting, it’s vital to know how each one works so you can choose the best bookkeeping practices for your business. As experts in the field, we at Rose Consulting, LLC have written down information regarding cash and accrual accounting. This way, you will be better prepared to choose a style for your business. 

A. Cash accounting  

With this method, you record income as it’s received and expenses as they’re paid. Cash basis accounting only records your expenses when money leaves your account to pay suppliers, vendors, and other third parties. Profit or loss also mirrors cash balance. Because of its simplicity, many small businesses and sole proprietors use the cash basis method as their primary method of accounting. However, this type of accounting is limited to funds received or expended. The income received in advance for working on a project is still recorded as income without the corresponding expenses. Since it doesn’t account for all incoming revenue or outgoing expenses, the cash accounting method can lead you to believe you’re having a very high cash flow month when in actuality, it’s a result of a previous month’s work.

B. Accrual accounting

With accrual accounting, income and expenses are recorded when they’re billed and earned, regardless of when the money is actually received. According to GAAP regulations, any business that is either publicly traded or produces over $25 million in sales revenue over a three-year period is required to use the accrual method. Accrual accounting gives small business owners a more realistic idea of income and accrued expenses during a certain period of time. This can provide you with a better overall understanding of consumer spending habits and allow you to plan better for peak months of operation. It provides you with increased advantages for tax planning and helps you make better business transactions. However, many small business owners view it as more complicated and expensive to implement due to its complexity, extra paperwork and potential for higher taxes. 

Takeaway 

For small companies that do business primarily through cash transactions and do not maintain large inventories of products, the cash accounting method can be a convenient and reliable way to keep tabs on revenue and expenses without the need for a great deal of bookkeeping. However, accrual accounting might be the better choice for the most accurate and updated accounting view of your financial health. The accrual method is recommended to present the proper financials for lenders and investors, especially if you invoice customers and maintain customer receivables. 

If you are looking for an accounting and business consulting firm in West Palm Beach, Florida, reach out to us at Rose Consulting, LLC. We focus on the needs of small to mid-size businesses. Our areas of expertise range from corporate and personal tax return preparation, tax advice, and accounting, including but not limited to financial statement preparation, bookkeeping services and business consulting. We offer tax preparation, accounting services, bookkeeping services and business consulting to clients across West Palm Beach, Palm Beach Gardens, Palm Springs, Lake Worth, Boynton Beach, and the rest of the United States. To learn more about the services we offer, please click here. To get in touch with us, please click here.