Small business owners manage a lot on their plate. From writing a bookkeeping business plan to figuring out how to pay themselves, there’s a lot to consider when first starting out. But one of the most vital and foundational tasks a business owner must consider is deciding on which accounting method is right for their business—especially when it comes to their personal and business needs, desire for simplicity, and tax purposes.
Luckily, there are only two accounting methods to choose from: accrual-basis accounting and cash-basis accounting—each with its own advantages and disadvantages. Understanding these will be key to identifying which accounting method and system will work best for your small business.
Even if you generally know what the two methods are, there’s no harm in getting a refresher. In this article, we’ll describe what each accounting method is and the benefits of each method.
What is Accrual-Basis Accounting?
The most common accounting method is accrual-basis accounting. Accrual accounting allows business owners to record income the moment that a product or service is sold, rather than when payment is received. In the same vein, expenses are recorded when business owners receive the goods or service from a contractor or vendor, rather than when they pay for the expense. This method is generally used by most businesses and tools like accounting software.
Kashoo’s Dashboard, for example, runs a full cash flow picture of your business by extracting financial information from your business as the software pulls bank data in. As a small business owner, you can easily run daily, weekly, monthly, or quarterly reports from the Reports section on the left navigation bar by using the Custom filter.
Standard reports like the Profit and Loss (P&L), Balance Sheet, and Sales Tax, helps business owners analyze real-time information. Graphs and charts that pull real-time cash flow information are also available under the Dashboard section and will be a game-changer for your business, particularly when planning for leaner months or seasonal periods where assistance is needed.
Benefits of Accrual Accounting Method
It helps with planning and forecasting: Accrual accounting method helps companies realize both revenue and expenses as they are incurred. Instead of waiting around for a cash transaction, accrual-basis accounting can instantly tell your business how well it’s performing and even help plan for leaner months. With accrual accounting, business owners can account for all revenue and expenses within a certain accounting period. For example, business owners can create budgets for expenses and predict sales, which is essential for staffing, inventories, and other areas of business operations.
Simpler taxes: Accrual accounting allows business owners to issue invoices both at the start and end of the year, which further helps with reducing the tax burden.
Investors prefer this accounting method: In an investor’s eyes, a business that uses accrual accounting over cash accounting is viewed as a more established business. If you know that your business is entering a funding stage or will eventually look to acquire more funds through investors, then the accrual accounting method may be the right fit for you.
What is Cash-Basis Accounting?
Cash-basis accounting is commonly used in the agricultural sector for businesses that meet the eligibility criteria as a farm business under the Canadian Income Tax Act. Unlike accrual accounting, cash-basis accounting records all business income and expenses when cash is received or paid.
Benefits of Cash Accounting Method
Cash accounting is a great accounting method for businesses that are eligible to gain a much clearer picture of cash flow: money in and money out. Because companies are recording transactions when cash flows in and out of the business, rather than when the transactions occur (with zero monetary exchange), businesses can truly paint a picture of where they stand financially. Cash accounting is also a much simpler way of bookkeeping and thus, helps make tax filing easier as well.
Read more on cash accounting here: https://kashoo.com/blog/benefits-cash-accounting-canadian-farm-businesses
Accrual and cash accounting each have their own advantages and disadvantages. If the benefits of one outweigh the other, then the accounting method should bring your business numerous benefits like the ones mentioned above. Want to find out how Kashoo can make the accrual-basis accounting easier? Discover the additional benefits you and your small business can gain by adopting accounting software with our 14-day free trial today.