Cash Basis Accounting vs. Accrual Basis Accounting. What’s the Difference?

    When you first open your new small business, you need to make an important decision: which accounting method will you use to record your finances? During tax time, the IRS will want to know which method you use, so it’s important to research each accounting method and choose the one that makes the most sense for your business. Let’s explore both accounting methods: the cash-basis accounting method, and the accrual-basis accounting method.

    The accounting method that is most popular and compliant with GAAP (Generally Accepted Accounting Principles) is the accrual-basis accounting method. This is because it requires a business to record income and expenses when they’re billed and earned (when they are incurred), not when the money actually moves. This means that the financial reports provide a more accurate long-term overview of a business’s finances. However, it’s important to note that this method is not required to be used by small businesses (unless they meet certain financial requirements).

    The cash-basis accounting method is the opposite of the accrual-basis accounting method. This method requires a business to record income and expenses as they’re received and paid (when the money actually moves), rather than when the income and expenses are earned and billed (when they are incurred). This also means that there is no accounts receivable or accounts payable management with cash-basis accounting. This method is useful in providing a business owner with a short-term overview of their financials.

    Typically, small businesses opt to implement the cash-basis accounting in their business as it’s easier to use and understand, and because it provides a more accurate overview of their financials in the short-term. However, it may be worthwhile to consider the accrual-basis accounting method for your business if you prefer to have more accurate long-term financial information. Although, it’s important to note that you will need to be more organized with your bookkeeping for this method, as it does not provide an accurate short-term view of your financials, which may affect certain business decisions you need to make.

    Regardless of the accounting method you choose, we can work with you and your business to assist with all of your bookkeeping needs.