The Cash method is like a checkbook. You record the income when you receive it, and record the expense when you write the check. This method works best for startup and small companies with only a few employees or those that have only a few transactions per day.
Advantage:
- It is simpler than the accrual method because it does not include the Accounts Receivable or Accounts Payable component of the Accrual Method.
- It provides a short-term picture of cash flow.
- Income is not subject to taxation until the money is actually received.
Disadvantage:
- Since it does not include the Accounts Receivable or Accounts Payable process, your true income and expenses may be misrepresented because of any outstanding invoices or bills that haven’t yet been reported.
As your business grows and becomes more complex, you may decide you need the detail of Accrual accounting.
The Accrual method records the income when the sale is made, whether you have been paid or not, and records the expense when incurred, even though it has not been paid. This method is required for all corporations who handle inventory or sales of over $5 million per year.
Advantage:
- It provides a bigger picture of how a business is performing over the long-term by more accurately tracking finances.
- This is used and preferred by the Accountants and CPA’s who may manage your accounts.
Disadvantage:
- It is a more complex system to learn.
- Income taxes may be owed on revenue before payment is actually received.
No matter which accounting system you use, talk with your accounting professional to ensure that you are keeping your company’s finances organized and accurate so that the next tax season is an easy one.
For additional questions contact MJB’s Bookkeeping Solutions, where we put the pieces together for your balanced bookkeeping solution.
