Choosing Between Cash-Basis and Accrual-Basis Accounting

Cash – Basis Accounting

Taxpayers using the cash method of accounting report income in the year in which it is received and take deductions in the year in which the expenses are actually paid. Cash Basis accounting is seen as a simpler method because it is easier to apply than the accrual method. However, some taxpayers are not allowed to use the cash method and must adopt an accrual method of accounting instead.

Accrual – Basis Accounting

Taxpayers using the accrual method of accounting report income in the year they earn it even if their customer has not yet paid and deduct expenses in the year they are liable for it even if they have not yet paid. Generally, if you have inventory, you must use the accrual method for inventory unless you meet one of the exceptions. Accrual basis accounting is more accurate and a better indication of business performance because it shows when income and expenses occurred.

Choosing Between the Two:

The main difference between the cash and accrual method of accounting is the timing of recognizing income and expenses.

Cash basis accounting may be the right choice for you and your business and is preferred by many small businesses because it’s easy to learn, offers a simplified process and shows you how much money you have on hand. However, cash basis accounting can provide an inaccurate financial picture since it does not account for all incoming revenue or outgoing expenses.

Accrual basis accounting also has its advantages and disadvantages. It can provide small businesses with a much more accurate picture of income and expenses and business performance. However, accrual basis accounting is often more complicated and can be costly to implement.

Choosing between the cash and accrual methods of accounting depends on your business and needs. Understanding the benefits and disadvantages can help you make the best choice for your business.