Cash Vs Accrual Accounting – Check With Your Accountant
When people first make the decision to go into business, they either buy an existing entity or start their own up from scratch. If buying a going concern with established accounting procedures, the new owners generally continue with the status quo, at least until they have a handle on everything. If, however, they decide to start off at the beginning, there are a number of crucial decisions they must make before any transactions take place. They must decide the structure of their business and also the basis of their accounting system. Misunderstandings and mistakes at this point can have long term implications further down the track which will need to be addressed.
In terms of the accounting system, the main decision to be made is whether the business will run with cash or accrual accounting. There are important distinctions between the two systems and the choice will be tied to the type of business, the products being sold and whether the intention is to be in business for a short time or build a long term asset. At this stage it is vital to discuss the whole issue with an
accountant Cooloola.
The difference between the two systems is really the timing, i.e. when the transactions are recorded in the accounting system. A cash accounting system records income and expenses at the time that money actually changes hands, while an accrual accounting system requires the transactions to be recorded at the time they take place, regardless of whether income has been received or expenses paid. There are benefits to both systems, depending upon the type of business, its size and complexity, and whether the owners are in it for the long haul.
Cash accounting suits a micro-business, especially in the services industry where the “product” is the skills of the self-employed business owner e.g. in a consultancy like writing resumes, providing tutoring services, personal training etc. Because income and expenses are recorded when they are incurred, the accounting records reflect the cash position of the business at any given time.
For more complex operations that sell physical products and need to know exactly what the overall financial position of the business is at any given time, accrual accounting is essential. This method captures every source of income and expenditure, whether or not it is realised. In terms of taxation, both systems are suitable for assessing the amount of
tax Cooloola the business is required to pay.
For a business with a long-term focus, the accrual accounting method is essential, while the cash method performs much like the management of a cheque account. In either case, the first step should be to consult a qualified accountant who will advise the best approach.
