Two Accounting Methods, One Business… What’s Best for You?
When you’re managing a small business, there’s no end to the list of factors you’ll have to consider if you want to succeed at it. Chief among these is the way you handle your money. You probably have already heard about the two business accounting methods: cash-basis, and accrual. You may have considered using cash bookkeeping due to its simplicity, but is that your best option?
The Differences Between Accrual and Cash Bookkeeping
First, it’s important to understand the fundamental differences between the two methods.
Accountants agree that cash bookkeeping, as mentioned, is simpler. It involves keeping transaction records based in the accounting period when the money and goods actually change hands. It means that your books will always reflect the cash currently in your accounts, whether or not you owe anyone anything, or if someone owes you. It’s harder to see the true profitability of a company with this method.
By contrast, the accrual basis for accounting considers all the invoices and bills that are currently outstanding, even if you or your customers still need to pay them. It reflects earnings, but not the current status of the company’s accounts
The Law is the Law
It’s easy to see that the two methods each have their advantages and their drawbacks. There’s another important consideration, though, that weighs heavily on the side of accrual accounting.
As a small business owner, you’re free to use either the cash or accrual methods of accounting, as long as your sales total less than $5 million per year. However, if your business must keep an inventory of merchandise to sell to consumers, the IRS requires that you use the accrual method. (QuickBooks)
If you keep inventory or if you plan to grow your business, you’ll need to keep that in mind. For these reasons, many businesses use a hybrid method that gives them a more complete picture.
The accrual method requires a lot more record-keeping than does cash bookkeeping, so we invite you in any case to take a look at the services SyncLedgers offers. We take care of all the paperwork you need to give you an accurate picture of your finances. Furthermore, SyncLedgers goes beyond the mere ledgers to provide our clients with powerful financial reports that show you where all your money is, and what it’s busy doing for you, so contact us today!