If you’re a small business owner, then you know that there are a million and one things to keep track of. From your inventory to your employees, it’s easy to let things slip through the cracks. But one thing you can’t afford to neglect is your accounting method. After all, how else are you going to know whether or not your business is actually making money?
There are two main types of accounting methods: accrual and cash. So, which one is best for your business? Let’s take a look at the pros and cons of each to help you make a decision.
The accrual method of accounting recognizes revenue when it is earned, regardless of when the cash is actually received. That means that if you deliver a product or service in December but don’t get paid until January, you would still recognize the revenue in December. For businesses that have a lot of receivables, this can be a big advantage.
The main downside of accrual accounting is that it can be more complex than cash accounting. Since revenue is recognized when it is earned, businesses must keep track of both their receivables and payables in order to properly reflect their financial situation. This can be tricky, especially for businesses that are just starting out and don’t have a lot of experience with accounting.
Cash accounting is just what it sounds like: revenue is only recognized when cash is actually received. So, if you deliver a product or service in December but don’t get paid until January, you wouldn’t recognize the revenue until January. For businesses that have a lot of receivables, this can be a major disadvantage.
The main advantage of cash accounting is that it is simpler than accrual accounting. Since revenue is only recognized when cash is received, businesses only have to keep track of their receipts in order to properly reflect their financial situation. This can be much easier than keeping track of both receivables and payables.
So, which type of accounting method is best for your business? There’s no easy answer. The best method for your business will depend on factors like the size of your business, the complexity of your finances, and your own personal preferences (no, not really, but your exit plan needs to be taken into account). Give us a call today at 801-692-0032 to find out which method would work best for you.
Donna Harris holds a BSci in Accounting and an MBA, and is the owner of Bookkeeping Made Simple.
Donna Harris, BSci Accounting, MBA, founded Bookkeeping Made Simple with the understanding that small businesses is the heart of the American economy. After offering to do books for a friend who said he didn't have enough work to keep someone in the office 20 hours a week, she recognized the need for an efficient, online system. She has 20 years of bookkeeping and accounting experience and is excited to help small business owners achieve their goals. She enjoys spending time with her family and traveling whenever possible. She also loves reading, hiking, camping, cooking, yoga, and fitness. A huge believer in lifelong education, she is currently working on her master's in Accounting.