Back
Learn about the difference between accrual and cash-basis accounting.
Business owners are responsible for making many important decisions every day, and one of the first crucial decisions you will make is which accounting method to use. The two methods that are the most different are cash-basis and accrual accounting, so you should be aware of the pros and cons of each. Continue reading for a comparison of accrual and cash-basis accounting to determine which is best for your business.
Cash-basis
Cash-basis accounting is the simplest accounting method, and many businesses use it for bookkeeping. This method only lets you use cash accounts so that you can record cash, expenses, and income, but you can’t track long-term liabilities, loans, or inventory. With cash-basis, you record income when you receive it and only report expenses when you pay them.
A few advantages of cash-basis accounting are that the method is less expensive than others, is simple and easy to use, requires less information to track, and is ideal for small business owners. There are, of course, cons to this method as well, including more restrictions on which businesses can use it, fewer businesses that can use it as they grow, and fewer available accounts.
Accrual Accounting
Accrual accounting is very different from cash-basis, as it is the most complex option out of all the accounting methods. It requires some basic accounting knowledge, as business owners will use more advanced accounts, such as accounts payable, current assets, and long term liabilities. You will need to record income when your transaction takes place, with or without the transfer of money, and you must record expenses when you are billed.
A few advantages of the accrual accounting method includes being able to anticipate future income and expenses, projecting long-term profitability, accessing various types of accounts for transactions, and helping you make smarter financial plans. Once again, there are also a few cons to this method, including that it is more complex than other methods and requires some accounting knowledge.
trust the professionals at the harding group
Unlike other accounting firms, The Harding Group, located in Annapolis, MD, will never charge you for emails or phone calls and will strive for open communication with our clients. Whether you are interested in business advising, tax preparation, bookkeeping and accounting, payroll services, Training + support for QuickBooks, or retirement planning, we have the expertise and years of experience to help. We serve clients in Annapolis, Anne Arundel County, Baltimore, Severna Park, and Columbia. If you are ready to take the stress out of taxes, contact us online or give us a call at (410) 573-9991 for a free consultation. For more tax tips, follow us on Facebook, Twitter, YouTube, and LinkedIn.