Is Accrual or Cash Accounting Best for Your Business?

cash counting in business

As a business owner, you have quite a few decisions to make regarding accounting, finances, and payroll. For example, you need to decide which of the two types of accounting methods will work best for your business: accrual or cash accounting. To help you make the right decision, we’ve outlined the pros and cons of each.

Cash accounting

This option recognizes revenue when cash is received and recognizes expenses whenever cash is paid out. With this method, there is no accounts payable or receivable.

  • Pros

When you look at your books, you will know exactly how much money you have on hand.

  • Cons

Since no money is recorded when until it is actually in your hands, if several payments come in a once, even sales from the previous month, they are recorded for that period. This can make some of the revenues seem higher when they actually were not.

Accrual accounting

This accounting method recognizes expenses and revenue when it is earned, no matter when cash goes in or out.

  • Pros

Since transactions are recorded when they happen, you can make predictions about your potential, future revenues. However, since these are recorded when a sale is made, but not necessarily paid, you may not have an accurate reflection of the amount of cash you have on-hand.

  • Cons

Your books will reflect money that has not yet been exchanged.

If you choose the wrong method it can cause a number of issues for you. For example, if you use accrual accounting and the business has reported revenue before the payment is actually received, it can result in a shortage of cash and impact your payroll for SME. However, with cash accounting, you will not have a view of the growth of your business, since you only report the revenue when it actually is in your hand.

When you evaluate the options and perhaps talk with a professional,   you will be able to find the best option for your business. The more you are able to find out about the various types of accounting for a business, the easier you will be able to choose the right option. The last thing that any business owner wants is to hurt themselves due to a lack of understanding about their finances. The help that you seek out from a professional will be very beneficial for you in the long run.

Finding the right professionals, like, will help you out greatly. They will be able to advice you on what they best accounting method is for your business.