Accounting is a vital part to any business, no matter how big or small it is. When deciding what type of accounting to use, you must see what works best for you and your company. Accrual base accounting and cash base accounting are two very different types of accounting, both work but you just have to decide which is better for your company.

Accrual base accounting is when revenues are reported when they are earned, which tends to occur before the cash or payment is received from the customer. The same goes for expenses, they are reported in the period for which they occurred which can be a different time than when the actual payment is made.

Cash based accounting is when revenues are reported in the period in which the cash is received from customers. Again, the same goes for expense, they are reported when the cash is paid instead of the time the expense occurred.

Both accrual and cash based accounting has its benefits and its drawbacks. Cash based accounting is great for many small businesses because it’s an easy type of accounting and does a good job of tracking cash flow. However, as businesses grow many tend to switch to accrual accounting in order to better track revenues and expenses. Accrual based accounting is far better at tracking revenues and expenses but does a poor job of tracking cash flow.

Accrual vs. cash

Accounting is important and just because you start with one type of accounting does not mean you have to stick with it. You have to find what works best for your company, do you have a stronger need to track cash flow or track revenue and expenses?

Still not sure which is right for your business, have this discussion with your CPA. We are here to help guide you all year long not just during tax season.