Which is better!? Cash vs Accrual Accounting
Entrepreneurs are often confused by the different accounting methods used to run a business. Have you found yourself wondering if you should be on a different method of accounting, asking yourself:
Which is better Cash Basis or Accrual?
Take comfort in knowing that you’re not alone in trying to figure this one out. The main difference in these two accounting methods is when the financial activities of a business are recognized.
I won’t be ACCRUAL; I’ll share the details.
Businesses on the Accrual accounting method are those who benefit most from anticipated financial activities. They report revenue at times when it is earned rather than when the cash is received. …I know what you’re thinking… WHO DOES that!?
The majority of people on both personal and professional levels use cash accounting (27 million + small business & individuals, as opposed to the big businesses on accrual at a mear 16k… if I round up). This is why the concept of reporting/using “anticipated” financial activity under the accrual accounting method seems so foreign to so many.
Accrual accounting tracks the amount of an invoice as revenue, EVEN IF THE INVOICE ISN’T PAID. And similarly, expenses that are known prior to the money leaving the bank are also tracked as if the money were already gone.
Anticipating activity this way is also powerful because it paints a near enough picture of what tomorrow actually looks like. Makes good sense for big box stores, factories, even multi-partner law firms to anticipate the money that will hit the bank or leave it prior to the actual events. Remember the WIP report? Anticipated income is a great way to attract investors for the company. Likewise, treating your outgoing costs in an anticipatory way allows for educated decision making when it comes time to spend more money.
Tracking and reporting gains/losses AND inventory, especially under seasonal activity can be another reason large businesses prefer and benefit from the accrual method. Their prior years’ quarterly reports give them plenty of information about what to do in the moments ahead.
“Show me the Money!”
Cash basis accounting is what most of us are doing. This method is all about tracking financials at the moment when money exchanges hands. Ever see Jerry Maguire? If you or the business is screaming “show me the money” your operations suggest that you are on a cash basis accounting method.
Tracking and understanding your cash flow is much easier under cash basis as well. Individuals and smaller businesses benefit from knowing what’s in the bank currently and being able to pull cash flow reports quickly, so they can make in-the-moment adjustments to their operations. Doing so is particularly handy for those who have fewer resources at their disposal.
Operating under a cash basis accounting method is great for those who need to know/report revenue and expenses as they happened by month/quarter, perfect if your receipts are more often greater than billable time/invoices.
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Well, regardless of HOW big your brain is…everyone, no matter the accounting system, benefits from having a pro that’s able to help. If you’re an attorney or partner in a law firm, contact us. We have the skinny on your particular accounting needs and can even help you ditch the old desktop software that keeps crashing. Find your metrics, grow your firm SMARTER! Call 239-349-2004 today!
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