Should A Small Business Use Cash Or Accrual Accounting?

Running a business means you have your hands in many pots stirring away to keep the business going. If you run a small business, chances are you are doing 90% of the daily tasks yourself. One of those tasks is handling your small business accounting. Keeping your finances in check ensures you know how your business is doing and helps to predict the future of your business. 

However, as a small business owner, we understand that even though you run your entire business, you may not be an expert in every facet. As a result, you may not know that there are two types of accounting methods that you can use to help you understand the financial health of your business. Those two methods are called cash accounting and accrual accounting.

You may be using one accounting method when the other might be more beneficial for you.  

So how do you know which accounting method to use? We’ve got the insight and information on whether you should be using cash or accrual accounting for your business and which process would be best suited for your business’s financial situation! 

Cash And Accrual Accounting

Again, we know that you may not have an accounting degree or a lot of experience working in the accounting industry, so we are going first to break down the differences between the two methods. 

Accrual Accounting

Accrual accounting is the process of recording an income or expense at the time of order, regardless of when cash is exchanged. 

This simply means you track your income and expenses based on when the order takes place. 

Many businesses utilize accounts payable and receivable and have terms for payment within so many days. 

Example: You place an order for copy paper on June 1st but won’t pay for it until July 1st. You will record the expense on June 1st even though there was no cash exchange. 

Cash Accounting 

Cash accounting is the opposite of accrual accounting. 

Cash accounting is the process of recording an income or expense at the time cash is exchanged. 

This means that no matter when the order happens, the expense or income is not recorded until cash is exchanged. 

Example: You place an order for copy paper on June 1st but won’t pay for it until July 1st. You will record the expense on July 1st. 

Note: Order and cash exchange can be completed on the same day. 

Which Accounting Process Is Better For My Business? Cash Or Accrual Accounting? 

There are different factors that go into deciding which accounting process is best for your situation. 

Truth be told, neither is the wrong choice, but there are ways to help you determine the best route for your needs. 

Accrual accounting is more complex than cash accounting but does provide a clearer picture of a business’s financial condition. This is because everything is recorded in real-time instead of when cash is exchanged. You’ll have a more accurate picture of expenses and incomes. 

Cash accounting is simpler and easier to understand. Often, most people use a cash basis for tax purposes as well until they get to a certain income level. Note your tax return can be reported on a cash basis, even if you do use accrual accounting. 

Determining if you should use cash or accrual accounting should be a discussion you have with your accountant to determine the best method for your business. 

Need Small Business Accounting Assistance? Partner With Redmond Accounting Today! 

If you’re in need of accounting assistance, you’ve come to the right place! 

Here at Redmond Accounting, we work with businesses all over the nation to provide the essential accounting services they need to run their business. Whether it’s bookkeeping, payroll, controller, or CFO services, we have what it takes to get the job done on time and with the utmost accuracy. 

We are a 100% online accounting firm and have been paperless for over a decade, which means you won’t be seeing stacks of paper from our end that clutter up your desk. We utilize cloud-based accounting and programs such as QuickBooks Online, Gusto, Expensify and BILL to seamlessly take care of your accounting. 

For more information on cloud accounting, read our latest article which discusses the benefits of cloud accounting you should know. 

To get started with a partnership, schedule a consultation today!