Cash or accrual? Accrual or cash? Which approach should I take?
Yeah, we’re talking about accounting approaches…again. But that’s ok. It’s our business. And it should be yours, too.
Sure, you’re the business owner, founder, inventor, chief creator or whatever. But if you don’t know how your expenses are handled then you might not be in business all that along.
So, please, pay attention, here. You do have a choice in accounting approaches. And it has to do with timing.
If you use cash basis accounting, revenue is recorded when cash is received from customers and expenses are recorded when cash is paid out (payroll and bills).
- Usually smaller businesses (less than $5 million in annual revenue)us this system as it is simpler.
- It is not about how you are paid (cash) rather it means that invoices aren’t income until they are settled.
- Same with bills—they aren’t expenses until they are paid.
Accrual basis accounting records revenue when it is earned and expenses are recorded when consumed. That is:
- Income is recognized as soon as an invoice is generated—not paid (payment received).
- And bills—expenses—are recognized as soon as they show up, not when they are paid.
- This system works better for larger companies, usually with $5 million or more in annual revenue.
Then there are hybrid systems, too. But be sure and understand your business and seek out the counsel of an accounting professional before you choose an accounting method for your company.
For more on how to choose and implement an accounting approach, call or write to us. TFO Solutions is dedicated to helping entrepreneurs and business owners with their financial strategy from the back office to the boardroom.
**photos courtesy of Unsplash (Steve Johnson and Scott Graham, photographers)