If you’re planning to start your business (regardless the size and type), one things you must be aware of is accounting method. Now there are two types of methods available, which include cash basis accounting and second is accrual accounting. I have also talked about the difference between these two. You can read this article here: Cash basis vs. Accrual accounting.
Anyway, today’s article major purpose is to let you people aware of cash basis accounting, which is fundamental for any business to successfully run with the right accounting method. So here am I with cash basis accounting.
Without much ado, let’s start from scratch.
What is cash basis accounting (CBA)?
In simple words, cash basis accounting is a renowned and most used accounting method of recognizing revenue when you receive money and expenses out of the money. In other words, you record payments received from clients or customers and money you spend (expenses) annually. That simply means revenue and expenses are only recorded when cash is received and paid, severally.
Let’s learn the benefits below.
Benefits of cash basis accounting
Below given benefits will help you understand how this accounting method is helpful for your business. Have a look at them below.
- – Cash basis accounting is cost-effective method that means any small to medium size business can afford it.
- – Small business owners and independent contractors who don’t carry any inventory, this accounting method is best and suitable for them.
- – With this method, businesses avoid employing accountants who use complex accounting methods. They use this accounting method because of it’s easy to use.
- – Cash basis accounting also provides you an accurate picture of how cash is on hand.
- – You can use this method to record financial results for tax purposes. For any business, preparing taxation form to pay taxes on time and keep accurate records under CBA.
Let me tell you some accountants providing virtual accounting services in Honolulu use this method for clients running small to medium size business.
Reasons why businesses must use cash basis accounting
In case, you’re wondering why you should be using this method then below I’m going to highlight some powerful reasons why businesses should adopt this method. Let’s read them:
- – Businesses that use single-entry bookkeeping can use this method to manage their business finances.
- – If you make few transactions in a day
- – If your business has few employees working in your company
- – Businesses that don’t deliver goods and services on credit
- – If your business has no inventory to track
Basically, if you’re a small to medium sized owned business, this CBA is perfect method for you. In fact, this is a cost-effective way to keep business accounting records.
Some points to remember when using CBA
Guys, if you have made up your mind to integrate this accounting method in your business then here are some of the crucial tips which you must be keeping in your mind. Let’s talk about them below:
- – Though cash basis accounting provides you real picture of your business, it sometimes misleads. Why? Because this method may neglect the pending expenses or revenue of your business.
- – Cash basis accounting is single-entry accounting system and not suitable for accrual methods.
- – The management report can be issued with this method as you get inaccurate results sometimes. So avoid making report during that time.
- – If you want your business to be audited by authorities then you have to switch to accrual base accounting.
- – The reason people adopt CBA because it’s simplest method available for businesses available online.
Moreover, you can also consider hiring bookkeeping services in San Jose at most reasonable price.
The bottom line
A business is considered a successful one when you’re able to maintain and manage your business finances with full accuracy. Well, this article is for small business owners having fewer employees and making few transactions per day. So I believe you found this article helpful and I’m able to make sense here.
Anyway, if you got any query related to business finance, accounting, bookkeeping, and taxation, Kayabooks is here to help you with that. Without a second thought, get in touch with us or give us a ring at +1 (800) 433-6819 (Toll Free)