Cash accounting versus accrual accounting

There are two primary methods of accounting to follow, cash accounting and accrual accounting, when running the financial department of a business. While some small business owners have the option to choose which method works best for their businesses, others are legally bound to utilise the accrual accounting method. Each method offers comparable benefits to your business’s finances, though these accounting processes differ greatly from each other. QuickBooks looks at the major advantages of cash accounting and accrual accounting to help you understand and make an informed decision about your business’s finances.

As a general rule, businesses who implement either of the two, cash accounting or accrual accounting methods, should maintain the same method from year to year. When switching from cash accounting to accrual accounting, or vice versa, it is in the business’s best interest to notify the third party tax revenue service to which taxes are paid to ensure accuracy and avoid misrepresentation of company tax returns.

QuickBooks accounting software is an effective tool that helps businesses to prepare tax return documents and all major financial statements easily and accurately.

Understanding cash accounting

The term cash accounting is self-explanatory: accounting events are recorded when payment is received or paid. Therefore, businesses will not record a payment for services rendered until the client has paid for these services. For example, if a transaction is agreed upon on May 1st, and payment is only received on May 25th then the transaction will only be recorded on May 25th when the funds have been received. The same is true for money that is paid out by the business. If a business has ordered new office furniture from a retail store, the transaction is not recorded when the furniture arrives but when payment for the furniture has been paid to the store.

Many small businesses tend to start out using the cash accounting method as it is a simple and effective method to keep track of all financial transactions. Larger businesses such as closed corporations, partnership companies with at least one closed corporation partner and tax shelters are not allowed to implement cash accounting as their financial records are on a much larger scale than small businesses.

Understanding accrual accounting

In contrast to cash accounting, accrual accounting incorporates a method that requires businesses to record a transaction the very moment that it is established – whether payment has been physically received or not. With accrual accounting, a business’s income is recorded when the client has been sent the bill, and an expense is recorded when a bill is received by the business. The bill will indicate the deadline for when payment will be received, but the transaction will be recorded when the agreement was made.

Large corporations utilise accrual accounting to keep track of all income and expense statements because the payment amounts dealt with are usually high, and to keep a solid record of what is owed to and by the business.

QuickBooks accounting software for your small to medium business

Deciding on a particular method of accounting for your small to medium business is not easy. You have to be entirely certain about the method you choose because you’ll be required to commit to it year after year. QuickBooks accounting software replaces the need for a qualified accountant with its seamless implementation of all important accounting processes and an easy-to-master interface – so that you spend less time balancing your books, and have more time focusing on growing your business.

Get QuickBooks Pro, QuickBooks SimpleStart or QuickBooks Premier accounting software for your business today.