When it comes to recording business revenue and expenses, there are two methods which businesses choose to go with. These methods are cash accounting and accrual accounting. Both the methods are crucial in their own way however preferring the right method aids you grow your business and manage company’s finances. Nevertheless, the burning question here is which method one should go with. If you’re concerned about this then understating the difference between these two methods is must for you.
To make it easy for you, here in this article, I’m going to talk about the major difference between cash accounting and accrual accounting.
Without wasting much time, let’s get started.
Start by understating the definition…
What is cash accounting?
Simply putting, cash accounting method records the income and expenses occurred in the company. Let me tell you that this method is quite simple to maintain that’s why most of the small accounting firm uses this method. Even if you want to manage personal finances, then cash accounting should be your go-to.
What accrual accounting is?
Accrual accounting, on the other hand, is the method of recording revenue and expense when you earn them. Basically, accountants or financial firms have to count income when it is billed and expenses when they arrive.
Let’s now hop on to know the difference between these two.
Major difference between cash accounting and accrual accounting
Tracking the cash flow of the company
The very first difference which makes both these methods differ from each other is tracking the cash flow. So, which method is best for tracking the cash flow? If you guess cash accounting, hey you’re right. If you want to track cash flow or transaction or your company, cash accounting method is right for you as you can easily track your cash.
Winner: Cash accounting
Accurate picture of company’s revenue
When it comes to checking and knowing about the accurate picture of company’s profitability, the method which works best for you is accrual accounting. With cash accounting method, you may not be able to track your cash in the long term. But accrual accounting works by recording your accounts receivables and payables and that’s how it shows you a picture of your company’s revenue. As you know that with accrual method you can record all the revenue you earn and expenses incurred. Accounting firm providing virtual bookkeeping services in Phoenix uses this method only for determining their business profitability.
Winner: Accrual accounting
Suitable type of business
Choosing the type of method also depends upon the kind of business you run. Whether you run a small business or large, right method will add glory to your business. Here let me tell you that accrual accounting is suitable for large size of business dealing with big contract and large amount of money generation. Whereas cash accounting is good for small businesses that generate cash on daily basis unlike big contract.
Winner: It’s neutral and all depends on your type of your business you’re running.
Insight of your business
Which method is good at giving you good insight into the overall health of your business? Let’s talk about it here. If I talk about cash accounting then it might not give you much insight into the overall health of your business. Now you can guess that accrual accounting surely provides you deep insight of your business as it records every income and expense of the business. In fact if you hire accounting services in New York, the professionals will also recommend you using this method only.
Winner: Accrual accounting
Over to you
Did you understand the difference between these two methods? Well, cash accounting and accrual accounting are different segment of the same coin. Each method comes up with their own pros and cons. And when it comes to choosing the right method for securing your business finances rightly depends upon the size and type of business you’re running, type of transactions you make, income you earn per day, resources you have, and client’s contact you get. Let me also tell you that you can use accounting software to manage your business finances.
Let me finally conclude by saying that the ball is in your court, just go with the method is suitable for you and your business type.
Also, get in touch if there is any query and issue you have. Else call us at +1 (800) 443-6819