If you manage a business and record its expenses and revenue, you need to find a recording system that suits you. While cash basis accounting has its benefits, accrual accounting can be a more powerful tool for operating your business. So what is the difference?
This difference comes down to timing. If you record expenses or revenue when you pay or receive money, it is cash basis accounting. However, if you record them when you have a bill or raise an invoice, it is accrual.
Accrual basis accounting
Accrual accounting refers to when a business identifies when a bill comes in, regardless of when the payment is being made and notes income as soon as they raise invoices for customers.
The benefits of accrual accounting include having a more accurate overview of a business’s finances and performance, making more assured financial decisions and making it easier, in some circumstances, to pitch for long-term finance.
One potential issue with accrual accounting is that you may have to pay tax on income before a customer has paid you. However, you could claim this tax back later on your return.
Cash basis accounting
Using cash basis accounting, businesses only include income from their invoices in their accounts once they are settled, be that for bills, expenses or income. It is not restricted to cash payments.
The benefits of cash accounting are that it is simple and enables you to know how much money you have on hand, often making it easier to calculate tax.
The potential issues with cash accounting are that not all companies can use it, it is not always accurate and does not help in making larger financial or management decisions, as you only have a view of your current finances.
Businesses need to consider which form of accounting is most suited to their business and seek advice from a qualified professional before adopting one or the other.
If you need more information or help in finding the right accounting process for you, please contact our experts today.
