- As a business grows, using accrual basis accounting becomes essential
- Cash accounting doesn’t reflect the full reality of one’s obligations
- The accrual basis is more complex but gives a much clearer picture
- Outsourcing bookkeeping lets you devote resources appropriately
- SyncLedgers provides benefits on top of daily recordkeeping.
When some small businesses are just starting out, it makes plenty of sense to keep the bookkeeping simple. A basic spreadsheet tracking cash receipts and expenditures may be enough when you’re small and don’t have a lot to worry about. With growth comes responsibility, however. Once you start dealing with purchase orders and contracts, that sort of cash basis accounting ceases to give you an accurate picture of your company’s financial status. That’s when you’ll need to start implementing accrual basis accounting.
The benefits of this system are clear, but what’s also clear is that it takes a bit more work to capture the necessary details.
What Is Accrual Basis Accounting?
The basic difference between cash and accrual basis accounting is the question of when you record revenue. With cash basis, it’s quite simple: when you receive cash, you write it down. When you spend cash, you write it down. At first, this seems like it would be a better system since it involves less complication. It doesn’t necessarily provide the accurate picture that one might think it does, though.
Cash basis doesn’t take into consideration whether you’ve paid for something you haven’t received yet. Nor does it reflect whether you’ve received something that you still owe somebody money for. It’s just raw cash in, and cash out. No debts, no promises.
Accrual basis accounting, on the other hand, does reflect the moment your revenue is earned, as well as the moment you receive it.
As an example, if your company provides a suite of services worth $10,000 to a client, with the agreement that they will pay in installments over a set period of time, this accounting method reflects the entire transaction.
The record of your cash will at first show no change from the transaction. Meanwhile, however, the $10,000 value of those services will appear in accounts receivable. The full $10,000 also appears in retained earnings, revenue, and net income, although it doesn’t affect your cash flow.
As the customer makes their periodic payments, you record the amount of each payment as an increase in the cash account, and a decrease in accounts receivable. It doesn’t affect your earnings, though, because you already earned them way back when you provided your services!
How Does Accrual Basis Accounting Help My Business?
As we noted above, a ledger using accrual basis will reflect accounts receivable, accounts payable, and other assets and liabilities. This allows you to see at a glance the actual status of all of your company’s obligations, as well as what you have rightfully earned. It reflects everything that you owe to others, and what they owe you.
In this way, you can more effectively see just how well your business is actually performing. If you’re making enough sales, you’ll see a constant inflow into accounts receivable. If you’re satisfying your good customers and delivering on your agreements, you’ll see cash deposits happening as well.
Likewise, accrual basis accounting provides you with an easier way to verify whether you do, in fact, have the cash on hand, combined with other assets, that you need for investing in your company’s future. Since cash basis alone doesn’t show the debts you owe, you can deceive yourself! If you have lots of cash, you might also have lots of invisible commitments that you already need to spend it on. The accrual basis reveals to you what your true resources are after all is said and done.
Bookkeeping Services Help You Stay Sane
The main disadvantage of using accrual basis accounting is that it obviously requires much more detailed bookkeeping. You have to use double-entry ledgers, and record all transactions in at least two places to ensure that the accounting equations balance.
For a small business that’s just starting out without much to deal with yet, this may not be a huge problem. As business picks up, however, this will imply a great deal more time and effort. You may find that you don’t have that much time available. And you would probably prefer to spend your efforts on other aspects of your business.
That’s why outsourcing your bookkeeping is such a smart solution. Sure, you could hire somebody to work in-house right next to you in your office. Depending on where you are, though, that’s an expensive proposition.
A typical salary for an in-house bookkeeper in the United States runs $30,400-$39,898 according to Salary.com. The average annual pay for a bookkeeping account executive is $68,294, or $57,600 for a payroll manager, according to BookkeeperList.com.https://smallbusiness.costhelper.com/bookkeepers.html
Working With SyncLedgers
SyncLedgers makes it incredibly simple for you to get a handle on both your day-to-day and monthly finances. We take care of all our clients’ record entries, account reconciliations, month-end closing, and more.
We also provide custom dashboards and clear financial reports. That’s so you can always see exactly where your money is, and what it’s doing for you.
Contact us today to set yourself free from the burden of DIY bookkeeping! Start enjoying all the advantages of professional accounting strategies!