Tax tips, tax, it expenses, startups, small business

When starting a business, deciding on which bookkeeping method is best suited to your business may be confusing. Two methods that you can use are cash vs. accrual accounting.

What is Cash Accounting?

Cash accounting tracks the actual money that is coming in and out of your business. If you receive an invoice, you do not record the cost until you have actually paid the invoice. This also applies when you send an invoice to a customer, you do not record the sale until you have received your payment. An example of this would be if you sent an invoice on Wednesday, but didn’t receive the payment until the following Monday, you then record the income against Monday’s date.

Pros and Cons of Cash Accounting

  • A much simpler way to keep track of your cash flows
  • It is suited to smaller businesses that generally handle cash transactions
  • Gives you an idea about how much money you actually have, whether it be in your till or bank accounts
  • It won’t show any money that is owed to you or money you owe to other people

What is Accrual Accounting?

Accrual accounting is when you do record your expenses and sales on the day they take place. An example would be a if you are an electrician and you have sent an invoice for a project you’ve completed and you record the sale in your book straight away. Even though you haven’t received a payment yet, this method shows you the amounts you owe to people and the amounts owing to you.

 

Pros and Cons of Accrual Accounting

  • If you are dealing with large amounts of money or contracts it is more helpful
  • It tracks your true financial position (it captures money owing and owed)
  • If your business generally doesn’t get paid straight away this method will be better suited to you
  • However It is a more complicated method

 

Choosing a Method

When it comes to choosing a method you need to think about the following:

  • The size of your business, a smaller business would generally use the cash accounting method, however they have the option of both
  • How complicated your business processes and transactions are
  • Whether or not you actually have the resources to manage accrual accounting

 

Before deciding on an accounting method you should consider talking to an accounting or business professional.

 

This Tax Tips Tuesday is brought to you with love by Nudge Accounting. You can read other Tax Tips here.