Keeping accurate financial records is fundamental to the efficient running and ultimate success of your business. Most business owners make use of accounting software and the support of a good bookkeeper to help keep them on track and ensure that all transactions are recorded in a timely manner. But what accounting approach should you use? Essentially there are two methods of accounting but what’s the difference between cash and accrual accounting?
The Difference Between Cash and Accrual Accounting
You might be wondering why choosing the right accounting method is so important for your business. The key to understanding the difference between cash and accrual accounting lies in the timing of when revenue and expenses appear in your financial reports.
Cash Accounting Explained
Typically cash-basis accounting is used by smaller businesses who prioritise simplicity. Using cash-basis accounting a company records expenses and income as the cash is actually paid out and received.
There are some advantages to using cash-basis accounting such as:
- It’s easier to keep a track of your cash flow
- It’s suited to smaller businesses that mostly handle transactions in cash
The major disadvantage of the cash method is that it doesn’t capture money owed to you or that you owe to others so it can be difficult to get an accurate picture of how the business is performing financially. Take a business which delivers training funded by various different governments and receives lump payments on a few occasions a year. Using cash-basis accounting it is extremely difficult to track the health of this business because they either have ample cash or have been incurring expenses for which they are yet to receive payment.
So What Is Accrual Accounting?
Accrual accounting, whilst a little more complicated, is much better suited to larger businesses or businesses who don’t get paid straight away.
Using accrual accounting you record expenses and sales when they take place as opposed to when cash is paid or received. For example using Accrual accounting our training business would apportion lump payments throughout the year depending on when the actual training was carried out. Now income and expenses are matched and the business has a true picture of their financial position.
A word of warning though, if you are using accrual accounting you need to keep an eye on your cash flow because any issues won’t necessarily appear in your financial statements.
How To Decide Which Accounting Method Is Right For Your Business
As we’ve highlighted the type of business you are running will be an important factor in deciding which is the most appropriate accounting method. While accrual accounting may require more work, technology and decent accounting software can make this far easier. This is also where the support of a well trained, experienced bookkeeper will pay dividends. As we highlighted in our last blog exploring how a bookkeeper can help your business, they will be able to help keep your records up to date and save you time and money. And if you want to introduce accrual accounting into your business, you simply need to ask your bookkeeper to start providing you with accrual accounting financial statements.
At Numera Bookkeeping Services, we provide more than most traditional bookkeepers. With significant experience across a wide range of industry sectors, our Brisbane bookkeepers are able to support you with all the standard bookkeeping services, including BAS preparation and lodgment, as well as advising on the most appropriate accounting method for your business. We can also support you in choosing the best accounting package for your business: Xero, MYOB, Quickbooks and Reckon.
Speak to the team at Numera Bookkeeping Services to make this happen. Work with the Brisbane bookkeepers you can trust. Give us a call today on 07 3002 4880 or email [email protected] to find out how we can help your business.