As a small business owner, you’re likely wearing many hats, and one of those might be the “bookkeeper” hat. Even if you outsource your bookkeeping, it’s important to understand the fundamental accounting methods that can impact your business’s financial picture: cash and accrual accounting.
So, what’s the difference? Let’s break it down:
Cash Accounting: Keeping it Simple
With cash accounting, you record income and expenses only when cash actually changes hands.
- Example: You send an invoice to a client in January, but they don’t pay until February. Under cash accounting, you’d record the income in February, when you receive the payment.
Accrual Accounting: The Bigger Picture
Accrual accounting recognizes income when it’s earned and expenses when they’re incurred, regardless of when cash is received or paid.
- Example: Using the same scenario as above, with accrual accounting, you’d record the income in January, when you earned it by delivering the service or product, even though you haven’t been paid yet.
Pros and Cons: A Quick Comparison
| Feature | Cash Accounting | Accrual Accounting |
| Simplicity | Easier to track, especially for small businesses with fewer transactions | Can be more complex, requiring tracking of receivables and payables |
| Cash Flow Visibility | Provides a clear picture of your current cash on hand | May not reflect actual cash flow as accurately |
| Financial Accuracy | Can be less accurate, especially for businesses with credit sales or inventory | Provides a more accurate view of long-term profitability |
| Tax Implications | Can defer taxes on income until it’s received | May result in higher taxes in the short term if income is earned but not yet received |
Which Method Should You Choose?
The best method for your business depends on several factors:
- Business Size and Complexity: Small businesses with straightforward transactions may find cash accounting sufficient. Larger businesses or those with credit sales and inventory often benefit from accrual accounting’s more accurate picture.
- Industry: Some industries, like construction or manufacturing, might prefer accrual accounting to track long-term projects accurately.
- Tax Requirements: The IRS has rules about which businesses can use cash accounting. If your business has significant revenue or inventory, you might be required to use accrual accounting.
- Need for Funding: If you’re seeking loans or investments, accrual accounting can provide a clearer picture of your financial health to potential lenders or investors.
QuickBooks Online Can Handle Both!
Whether you choose cash or accrual accounting, QuickBooks Online can make the process easier. Its features allow you to track income and expenses, generate reports, and even switch between accounting methods if needed.
Need Help Deciding or Managing Your Books?
Cooked Books is here to help! We specialize in QuickBooks Online bookkeeping services and can guide you in choosing the right accounting method for your business. We’ll also ensure your books are accurate and up-to-date, so you can focus on what you do best – running your business!
Contact us today for a free consultation!