Accrual Accounting Or Cash Accounting - Which Method is Best For Your Business?

By Richard T. Tyler
Business accounting usually falls under one of two categories, accrual or cash. A business has to choose which one is the most suitable for them, but both methods have their merits. This article will highlight the pros and cons of both methods so you can make an informed decision.

Some people love the cash method of accounting. This method is based on when the money is transacted. For example if my business sells $10,000 worth of goods in December, but if the money is received in January, then it is recorded on the books for January of the following year.

The advantage of using cash accounting is that it can help you record the high and low points. For example it can help you realise when customers are late with payments, or customers who change their mind. These transactions are shown in the books when the money comes in, so you can tell how your business is doing financially and up to date. The disadvantage is that the cash method shows you how and when your business are making money, however not how much business you're doing per month. For example you could get a large order in December, so you have to fork out a lot of cash for this order. However your books might show you getting paid January, even though the deal was done in Dec, the books show a better month in Jan than Dec.

Now the accrual method of accounting involves deal dates rather than actual funds. . If I sell my merchandise, my books will reflect the sale as the day the goods leave the warehouse. Also if I buy a new piece of machinery for my business, the amount spent is deducted from my books on the day the machine arrives. Even though I might not pay for the machine, the transaction is considered complete in my books.

Using this method of accounting is like forecasting how your business is doing. This method is great for companies who wish to use their accounting books to budget for expenses and outgoings. However the disadvantage to using this method is that it will give you a skewed image of how your business is actually doling. For example, sales may appear to be soaring in Dec and the transactions are recorded, but the money actually comes in until Jan.

Generally when a business has less than $5 million in sales in a year can choose either method. For the companies that make over that amount, or keep an inventory of goods for sale, are required to use the accrual method of accounting.

Both methods paint a different financial picture for a company. Purchase trends depend on the product sold, and that in turn decides how a company should look after its finances.

Richard Tyler is a happily retired investment guru who ran several successful businesses during his earlier years. He now shares his wealth of knowledge on investment, business and strategic wealth management at Invest Money Stocks. For more free useful articles on business planning please visit Invest Money Stocks.

Article Source: http://EzineArticles.com/?expert=Richard_T._Tyler