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The Pros and Cons of Accrual vs Cash Basis Accounting for Small Businesses

As a small business owner, it is important to choose the right accounting method to accurately track and report your financial transactions. Two common accounting methods used by small businesses are accrual and cash basis accounting. In this article, we will discuss the pros and cons of each method to help you make an informed decision.

What is Accrual Accounting?

Accrual accounting records revenue and costs as they are incurred, regardless of when the cash is actually received or paid. This method is commonly used by larger businesses and is required for businesses with more than $10 million in annual revenue.

Pros of Accrual Accounting:

Better Matching of Revenue and Expenses: Accrual accounting accurately matches revenue and expenses to the period in which they are earned or incurred. This provides a more accurate picture of a business's financial performance.

More Accurate Reporting: Accrual accounting gives a more precise view of a company's financial health. by recognising revenue and expenses when they occur, rather than when cash is received or paid.

Better for Long-Term Planning: Accrual accounting provides a better view of a business's long-term financial health by including future revenue and expenses in financial reports.

Cons of Accrual Accounting:

Complexity: Accrual accounting is a bit harder and more consuming than cash basis accounting, as it requires the tracking of unpaid bills and uncollected revenue.

Cash Flow: Accrual accounting does not provide an accurate picture of a business's cash flow, as revenue is recognised when earned, regardless of when cash is received.

Greater Need for Professional Assistance: Due to the complexity of accrual accounting, small businesses may require professional assistance to properly implement and maintain this accounting method.

What Is Cash Basis Accounting?

Cash basis accounts for income and costs only when cash is collected or paid.This method is commonly used by small businesses and is required for businesses with less than $10 million in annual revenue.

Pros of Cash Basis Accounting: 

Simplicity: Cash basis accounting is simple and straightforward, as it only requires the tracking of cash receipts and payments.

Better Cash Flow Management: Cash basis accounting provides an accurate picture of a business's cash flow, as revenue is recognised when cash is received.

Lower Cost: Cash basis accounting is generally less expensive than accrual accounting, as it requires less time and expertise.

Cons of Cash Basis Accounting:

Limited Long-Term Planning: Cash basis accounting does not provide a complete picture of a business's long-term financial health, as it does not include future revenue and expenses in financial reports.

Inaccurate Financial Reporting: Because revenue and costs are only recognised when cash is received or expended, rather than when they are earned or incurred, cash basis accounting can present a misleading picture of a company's financial health.

Limited Use: Cash basis accounting is not accepted by some lenders and investors, as it does not provide a complete picture of a business's financial health.

Both accrual and cash basis accounting have their pros and cons. Small business owners should carefully consider their business needs and financial goals before choosing an accounting method. 

Accrual accounting may be more suitable for businesses with larger revenue streams and a need for accurate financial reporting, while cash basis accounting may be more suited to smaller businesses with simpler financial transactions and a need for better cash flow management.

Regardless of the accounting method chosen, small business owners should seek professional assistance to ensure proper implementation and compliance with Australian accounting standards.

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Small businesses require very specific accounting needs. M.A.S. Partners have the expertise as well as the needed experience to take small businesses to the next level. If you want to collaborate with highly proficient small business accountants in Sydney or Zetland, contact us here.