Cash Basis vs. Accrual Accounting: Which Method Should I Choose?
Oftentimes, small business owners are tasked with learning all the different skills necessary to keep their business functioning properly. This could include developing skill sets in marketing, operations, and even accounting. This leaves many business owners and contractors to keep their own books or prep them for a third-party accountant. However, this responsibility begs the question of which method of accounting owners should utilize: cash basis accounting vs. accrual accounting. In this piece, we’ll be breaking down the different applications of each accounting method. We’ll also lay out the reasons one might choose one of the other.
Which is Ideal: Cash Basis or Accrual Accounting Method?
The main differences between cash basis accounting and accrual accounting are the way both methods recognize income and expenses. In using the cash basis accounting method, we recognize and record income when we receive it from the customer. Likewise, we recognize an expense when that expense is actually paid with cash, check, or credit card. The cash basis accounting method is the easiest to understand when you are first starting. This is because you don’t have to include elements of time that are included in the accrual method.
Business Types Play a Major Role
The cash basis method and the accrual method are used differently by different types of businesses. However, the cash basis accounting method is most suited to those types of businesses that want the easiest method of bookkeeping available. It is the system that about 75% of small businesses use because they also file their year-end tax returns on the cash basis method. It is approved by the IRS for both of these purposes. If you are keeping your company books for tax purposes then the cash basis method is the easiest and most efficient to use.
Smaller businesses like landscape contractors and remodeling contractors of all types, restaurants, shop owners, on-line businesses, gas stations, convenient stores, lawyers, IT businesses, repair shops and many more receive their income and pay their expenses in the same month so they would be prime candidates for using the cash basis method of accounting.
Larger businesses have to carry receivables and payables and want to keep books for management purposes. These kinds of businesses would normally use the more complicated accrual accounting method.
Different Problems Call for Different Solutions
Note that another difference between cash basis and accrual accounting is based on timing and situational circumstances. If you’ve fallen behind in your bookkeeping, you would only use the cash basis method to catch up. You would not use the accrual method to catch up, unless it is the same way you file your tax returns. If you wait until the end of the year to take your information to an accountant, know that the same goes for them. They would use the cash basis method to catch up on the work and make it ready for tax filing.
Get Cash Basis Accounting for Quickbooks for a Thorough Rundown
Like everything else in life, there are exceptions to these rules. Both the cash basis and accrual methods of accounting are actually rarely ever 100% cash or accrual. Both of these methods implement elements of one another. This level of cross-over makes it that much more necessary to understand both methods of accounting because, in reality, they are hybrids of one another.
To be as clear as possible on the different applications of cash basis vs. accrual accounting, we recommend doing as much research as possible to gain a working understanding. Luckily, our Certified Quickbooks ProAdvisors and authors Mike and Eva Russell, have written the engaging, insightful new book Cash Basis Accounting for Quickbooks. This book is a step-by-step manual for business owners and contractors that teaches how to do business bookkeeping & tax prep quickly & easily. Visit our Amazon listing now to get the book for yourself or the business owner in your life! If you have any questions, please feel free to contact our team today.