Most businesses today rely upon one of the two basic accounting methods to keep their books. These are accounting methods that use either a cash or accrual basis. There isn’t one right choice for all business, so it’s important to understand more about cash and accrual accounting to determine which one will serve you the best.
Typically, the choice could depend upon your expected sales volume, if you tend to sell on credit a lot, and the way you have your business structured. Other factors that could impact your choices could include keeping inventory or even long-range business goals. Here at Vitale & Associates, LLC, we can offer you suggestions for accounting practiced based upon our experience and what we can learn about your company.
Understanding Accrual Accounting
To understand the accrual basis of accounting, it helps to understand the cash basis first. The cash basis is simple. It simply relies upon accounting for revenues and expenses as money changes hands. As a bill gets paid, it’s recorded as an expense. As customers pay bills, the transactions are recorded as revenue. Typically, very small companies and sole proprietors use the cash basis because it’s simple and may offer some tax advantages. For instance, a small business doesn’t have to report income until they actually receive it.
So, how is the accrual method of accounting different? In this case, both expenses and income get recorded right as they occur. It doesn’t matter if any money has changed hands or not. As soon as the company gets a bill, they record the expense if it’s been paid yet or not. As soon as a customer makes a purchase, it’s recorded as revenue even if the customer has not paid yet.
With this method, your business can deduct expenses before they’ve been paid. The downside is that you also have to declare revenue before it’s actually in your hands.
Should You Choose Accrual or Cash Accounting?
You can’t always choose which accounting method that you should use. Some companies have to use the accrual basis of accounting to conform with regulations. If you have a very large business or have structured your company as a corporation, you may have to use the accrual method to conform with
the rules. This is also true if your business stocks inventory for sale. In all of these cases, you need to use the accrual basis for accounting.
If you run a smaller business that isn’t a corporation and doesn’t rely upon inventory, you can choose which method suits you better. Again, very small companies often choose cash accounting because it’s simpler and because revenue doesn’t have to be declared until it has been received. Otherwise, many companies use the accrual basis for accounting because it’s more accurate in the long run.
Also, companies that intend to grow in the future might start out with an accrual basis to keep from having to switch accounting methods later on. It’s usually much easier to stick with one method than to start with another method and have to change everything later.
Does Your Business Need Help With Cash or Accrual Accounting?
Many businesses rely upon good accounting firms to help them create a good accounting process that can help them grow and relieve stress over accounting problems. As part of an established and independent accounting service in Connecticut, the professionals here at Vitale & Associates, LLC want to ensure your business accounting practices help to grow your business. The right accounting can give you the information you need to grow and ensure that your company has clean books. Contact us right away to see how we can help you.