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What is Cash vs Accrual Accounting?

By May 28, 2014August 28th, 20142014, Tax Tips

When considering your accounting management for your business, the possibilities are endless. However, two of the most popular accounting types are accrual and cash. They are very similar, and in fact mostly differ only when it comes to the timing of when transactions are credited to your accounts. When using the cash accounting method, money is only counted when it is physically received and the accrual accounting method counts income as soon as the order is placed instead of when the actual payment is received.

The cash method is the more commonly used method of the two, especially for small businesses. Businesses that make more than $5mil annually or that stock inventory to be sold to the public with over $1mil year in gross receipts must do their accounting on an accrual basis. Otherwise, it is optional for those with less than $5mil to do accrual or cash based accounting depending on their preferences.

The accrual method is useful to businesses due to its very thorough recording of expenses and payments, giving you a thorough idea of your cash flow. However, because payments and expenses are being recorded when they haven’t actually happened it may be difficult to keep track of your actual current assets.

Cash Flow Accounting has the benefit of offering an accurate, current picture of assets to a small business. At any time you will know exactly how much money you have. A major disadvantage is that it may offer an inaccurate overall profitability report. If business has been slow in a particular month but a lot of bills were paid, the business may show a spectacular month when it reality cash flow is limited.

Your trusted business advisor is the best qualified to sit down with you and go over your options when it comes to the accounting method you prefer for your small business. Call today at 303-232-8300 and speak to one of our experienced representatives to schedule your free consultation!

Accounting & Tax Solutions

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