Accrual Vs Cash Reporting
Although accounting is important for a business, choosing a suitable accounting system is more important. That is why it is essential to know the pros and cons of the two commonly known accounting methods, accrual and the cash basis reporting accounting methods. The major difference between accrual and cash reporting method has to do with, when the revenue and expenses are recorded. The Cash reporting method focuses more on when the cash is actually paid or received while accrual accounting considers account payables and account receivables.
Accrual Accounting
Companies, especially publicly traded companies, commonly use this accounting method. Accrual accounting method is a way of recording transactions that occur as they occur. Expenses and revenues are matched together. This implies that all expenses incurred on credit are recorded. All items sold made are recorded irrespective of whether the cash has being received or not. Sales made on credit (account receivables) and bills received but are yet to be paid for (account payables) are considered while using this method.
The benefit of accrual accounting method is that it gives an overview of the performance of the business over a given period. That is, it tracks credit and helps to plan and make important business decisions because transactions are recorded when it actually happens.
The flip side to this though is that the accrual accounting system is complex and more difficult to carry out than the cash reporting. Also, it does not track the cash flow of a business. Therefore, it does not provide adequate report on the profitability of a business.
Cash Reporting
This accounting system is suitable for individuals and small businesses. It is a method of recording a transaction only when cash has changed hands. Unlike accrual accounting, cash reporting system does not track receivables and payables.
The Cash reporting accounting system is not only simple and fast to compute, it also makes tracking the cash flow of a business very easy because it deals with cash. Furthermore, transactions done on credit are not taxed because they are not recorded.
On the downside, because it does not consider invoice, it is short term. The effect of this is that the future of the business cannot be predicted using this method. More so, it is difficult for businesses with inventories to use this method because it does not allow the matching of transactions with a specific item of inventory.
The Winner
Though most businesses use the accrual accounting method, if you have a small business that deals mainly in cash and does not have inventory then you can adopt the cash reporting method. Also, it is important to consider the goals of your business before choosing an accounting system. Accrual accounting system allows you to know what your profitability is likely to be in the future while the cash reporting accounting method shows the precise cash you have currently. In addition, the size of your business determines your accounting system. That is the business’ operations and specifics mostly dictate which accounting method is suitable.
After you have factored in the pros and cons of the two methods, then you can set up your accounting system with myBooks cloud accounting software.
