You’ve heard people talk about cash versus accrual accounting, but what is it all about? And why does accrual get all the glory? We take you through the basics.
The difference between cash basis and accrual basis accounting comes down to timing. When do you record revenue or expenses? If you do it when you pay or receive money, it’s cash basis accounting. If you do it when you get a bill or raise an invoice, it’s accrual basis accounting.
Accrual accounting is a far more powerful tool for managing a business, but cash accounting has its uses.
Businesses that use cash basis accounting recognise income and expenses only when money changes hands. They don’t count sent invoices as income, or bills as expenses – until they’ve been settled.
Despite the name, cash basis accounting has nothing to do with the form of payment you receive. You can be paid electronically and still do cash accounting.
Benefits of cash accounting
Businesses that use accrual accounting recognise income as soon as they raise an invoice for a customer. And when a bill comes in, it’s recognised as an expense even if payment won’t be made for another 30 days.
And while it’s true that accrual accounting requires more work, technology can do most of the heavy lifting for you. You can set up accounting software to read your bills and enter the numbers straight into your expenses on an accrual basis. It will also record your invoices as income as you raise them.
Call us today to find out more about this. We can set your business up to grow into the future – it’s what we do!