Whipping up burgers while dishing out a side of sweet customer service is your specialty. Accounting? Not so much.
Unfortunately, 50% of small businesses fail after half of a decade, and a common reason for this is subpar financial management.
In light of this, it’s critical that every business owner boost their understanding of accounting, which includes determining whether to choose the accrual vs cash basis accounting method.
So, which method is best for managing funds? Here’s a glimpse at what these methods have to offer for your business.
Let’s dig in!
The Two Types of Accounting
With cash basis accounting, you recognize your business’s revenue when you receive cash and pay your expenses.
For instance, let’s say that you invoice a few clients and they pay you a month later. You will recognize this revenue once you receive it, not when your services are billed.
Meanwhile, the accrual method recognizes both expenses and revenue when they are earned rather than whey they are paid or received.
For example, let’s say that you provide services to clients and issue them bills today. With the accrual approach, you will recognize this revenue today rather than when you receive the money.
Rundown on Accrual vs Cash Accounting
The cash method is simpler to use when compared with the accrual option. That’s because this method does not require you to track your business’s accounts receivable or payable.
This approach mirrors what you would do to balance your checkbook. You essentially start with a certain amount of funds and then add or subtract changes to the balance.
Given the above, the cash method is ideal for any sole proprietor or a business owner who doesn’t employ anyone.
Yet another benefit of the cash approach is that taxes don’t need to be paid on your revenue until you receive the revenue. This can tremendously help your cash flow, especially if you are new to entrepreneurship.
Still, the accrual method is often recommended by accountants because it offers a more precise picture of a business’s health. However, it is more complicated, so it is best reserved for any business who employs a bookkeeper or outsources their bookkeeping function.
Click for more information about the benefits of outsourcing your accounting tasks.
Choose the Right Accounting Method for Your Needs with Confidence
When it comes to choosing the accrual vs cash accounting method, both options offer unique advantages. Fortunately, when you select the right one, you can feel confident that it will add value to your business long term.
Consider the above-listed insights into both accounting methods as you seek to choose the most appropriate approach for your business. With the right option, you can increase your business’s chances of staying afloat for many more years to come.
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