Whether you are operating a small, medium or large business: your accounting method will define & impact the ability to finalize the financial decisions, hence, it becomes of utmost importance to choose the right one.
When a business grows their financial needs also change and in such a scenario, it is important to utilize the correct accounting type to track income and expenses. Usually, a small business goes with simple cash basis accounting method but over time they will need better insights into the financial health of the company.
But, before we get down to the nitty-gritty of the best accounting method for your business; let’s just understand one very important point. The only impounding difference that separates both these accounting methods is ‘timing’.
Accrual accounting is taken into consideration at the moment it is earned, spent or taken into action for every transactional value irrespective of whether you have received payment or not, however, on the other hand, cash method will only reflect transaction at the time of payment is actually received or made. (i.e, either when the amount is credited or debited).
What is Cash Basis Accounting?
This is the simpler out of the two and so is more acceptable by the small or early-stage businesses. Cash basis accounting actually records and reconcile all the cash inflows and outflows.
In simpler words, when cash is received, it is recorded under revenue and expenses are recorded when payments are made. This is a simple business method and doesn’t hold any combined records of account receivable or account payable. Hence, the entire set of information is recorded separately. The best advantage of this is that you can note transactions in real-time as they happen.
What is Accrual Basis Accounting?
This is another advanced way to handle business accounting. Under this method, all the transactions are recorded when they are done or earned to perfectly report on the financial results of a company and not the actual money or cash in the hand.
To understand this, consider a product is sold and at the same time revenue is recorded not when the invoice is paid by the customer. This is also similar for expenses which are documented when goods or services are received by the company. In a way, accrual basis accounting will provide you with a clearer picture of your company’s overall profitability.
Some of the benefits of accrual basis methods include consistency, greater financial opportunity and better analysis of your business.
Cash Versus Accrual Basis: Which Is Best For My Business?
To deduce the conclusion to which form of business accounting is best fit for your company, you should first figure out which could be most beneficial based on your company’s current standings and future goals.
Here are some important criteria to consider when performing this evaluation:
- Who are the users of the financial statements and information (management, investors, bank, tax advisors, etc.) and how will they use this financial information?
- What method of accounting is the company using for tax purposes?
- What is the vision of the company in the next 5 years?
Whether you decide to use a cash basis or accrual basis accounting method for your business, you’ll always be in need of proper tools such as best invoice generator. Cloud-based invoicing solution provider Moon Invoice helps you with your daily business tasks and it also simplifies the process.
Moon Invoice offers you multiple payment options along with multi-currency support. With Moon Invoice you can work from anywhere by downloading apps available for all platforms, i.e, iOS, Mac OS X, Android, and Windows. In addition to this, Moon Invoice app also helps your business with Import/Export & Print and Mobile & Sync.