If you are going to start a business, one of the decisions that you will make is to determine what can of method will you choose when it comes to accounting process and paying taxes. You have two options – Cash and Accrual. Before selecting a method, it will best to understand both process and what difference could it make in your computing methods.
Cash Method Accounting
This kind of accounting is used when you want to report income and earnings during the period of fiscal accounting. For legal and government entity, September 30 is time of filing and the rest of the companies; it is the end of the year. Cash based accounting means that when you receive the money the sales are recorded right away. The expenses is also recorded when they are paid. Cash based method is good if your income is less than one million and you instantly collect money for your product and service. Ironically the government used this method even if they earn more than trillion dollars.
If you choose cash based method accounting, there are a lot of benefits that go with it. Assess first your business because if cash based method can fit your process then you can save money from book keeping. If you don’t maintain an inventory or you don’t have customer accounts, then cash based method is a good choice because it much cheaper. With this method you can see right away if your business is becoming profitable.
Cash based accounting is a very simple method but it can only record cash transactions and doesn’t take note about everything else. It can never work for businesses who doesn’t credit or offer credit. If your business is not keeping inventory then this is a good choice. With this kind of accounting, there are no account receivable and account payable.
Accrual Based Accounting
Accrual accounting is widely used and accepted by most businesses because it can reflect the finances of any business. On the other hand, for accrual based accounting it means that the sales are also recorded when it occurs and it doesn’t matter if you receive money or not. This is a good method if your business is in average size. This is advisable when you need to keep track of your company’s profit on a regular basis. This type of accounting method deals with business output rather than its input. This is perfect method if your business wants to monitor their resources if it’s cost effective and efficient. With accrual based, you can compare the whole cost of your product and services with the standards of your industry. Another notable advantage is if you use accrual based accounting, you can improve your accounting and you can better manage your finances.
The best thing about this method is the fact that you know your financial position as of the moment. Your records can show how much clients owe you and how much you have spent on your inventory. The only disadvantage when it comes to accrual accounting is the fact that it’s very complex.
