Cash vs. Accrual Accounting
Posted by Rosalind Joseph on Tue, Jun 01, 2010 @ 09:54 AM
You probably heard these terms from your CPA or tax preparer. But what is it? And, how can one be more of a benefit than the other? When you are a business owner, it is important to understand how your revenue flows and your expenses are incurred.
In simple terms, cash basis of accounting is recognizing revenue when it is received and expenses when paid. Even if you pay the expense with a credit card, you can still recognize it in the year it was paid.
Accrual basis of accounting is recognizing revenue when it is earned and expenses when they are incurred regardless of whether you actually received the payment from the customer or paid the expense with cash.
Is one basis better than the other? It depends on your business. If you have a service-based business then the cash accounting might be the better way to go. You pay tax on what you've actually received, which can be beneficial at tax time, when you have a slow paying customer.
Accrual basis may also be the right choice. You get to recognize revenue and expenses in the year they occur whether you actually receive the cash or paid the expense or not. Regardless of the option you choose, a professional bookkeeper will keep your books up to date making it easier for you and your tax advisor to select the best option for you and your business.