How to choose the right accounting method for your business

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Accrual method and cash accounting method are two standard ways many businesses use. However, when setting up bookkeeping for your business, you need to choose which one to use, depending on different elements.

Hence, Innovature BPO accounting outsourcing services will share some practical factors to help businesses choose the right accounting method.

How to choose the right accounting method for your small business

Accrual or cash method?

1. Cash method

The cash method only recognizes revenue when cash is received and when expenses are paid. For example, if you receive a bill from a supplier due next month, that expense is not recognized until it is paid.

Small businesses often apply the cash method. It is easy to implement and does not require tracking accounts receivable and accounts payable. This method also eliminates the need for journal entries.

In addition, the cash method also makes it easier for businesses to track cash flow. You will always know how much cash you have at any time.

When to use the cash method

According to veteran financial experts, you should use the cash method if you are just starting your business. However, it’s also beneficial for those with limited cash. As taxes will be due on revenue when it’s received, not when services are provided.

Accounting outsourcing service: How to choose the right accounting method for your business
Accounting outsourcing service: How to choose the right accounting method for your business

If you are a freelancer, you should mainly focused on invoicing clients and getting paid. Cash accounting can easily handle that. You don’t have to pay taxes on the income until you receive it – an important factor if you have slow-paying clients.

New business owners also find it easier to start with the cash method than the accrual method. A new business has few reporting needs. You don’t have to manage a general ledger with numerous adjustments, and you always know the total cash you have.

2. Accrual method

The accrual method is more complex than the cash method, but CPA recommend you’d better use this method than cash method.

Unlike the cash method, the accrual method requires you to record your revenues and expenses when they are earned, not received or paid.

The accrual method also provides a realistic view of your business income and expenses. However, this method can be disastrous for small businesses with limited cash flow because you will have to pay taxes on income it has not yet received.

When to use the accrual method

Your business has few employees and just rented new office space. If you are starting to find potential investors, or apply for bank financing, think about using the accrual method.

You want to scale your business: While the cash method is the most powerful for very small businesses, small businesses can benefit from the accrual method. Especially, if you want to bring on employees, seek investors, or get bank financing.

When you bill your customers: If you regularly bill clients, it’s best to apply the accrual method. It will allow you to record your revenue at the time of service, not when your client pays, providing you with a more accurate financial picture.

If you are still confused about choosing between cash and accrual methods, your resources have numerous tasks, or you need to invest your time in business development. Now is the time to make a move to an accounting outsourcing company.

An accounting outsourcing company is an excellent aide to help you pick the best-fit accounting method. A reliable one always sticks to the plan and gives you accurate reports to show a better financial insight into your business.