Talking Cents

Cash or Accrual basis?

There are two kinds of most basic accounting methods used in bookkeeping systems: cash basis and accrual basis.

Cash basis involved reporting revenues on the income statement during the period when cash is received from customers and reporting expenses when the cash is paid out. It is useful for businesses with no inventory and/or sole proprietors. With this method, it is easy for businesses to know the actual cash flowing in and out. From a tax standpoint, cash basis method can be an advantage for new start-ups as recording income can be put off until the next tax year, while expenses are counted right away.

Accrual basis is the most commonly used method for companies who depends on their sales volume. It reports revenue on the statements when they are earned, that means it can occur before cash is received. Expenses are recorded when they expire which is often in a period different from the payment is made.

Question now is which method to use your small business use?

• Does your annual sales exceed $5 million?
• Is your business structured as a corporation?
• Does your business have inventory?
• Does your business sell on credit? 

Yes, to any of the questions above, you should most likely use the accrual method.

While on the other hand, if your small business is cash-based, and is a service company without inventory, you should use the cash method.

However, do consult your accountant or us to decide on an accounting method more accurately.