Bookkeeping for your business is all about recording and keeping track of its transactions. There are two transaction recognition methods recognized in Brisbane bookkeeping and accounting policies, cash and accrual methods.
The Differences between Cash and Accrual Methods
Both methods are correct and applicable to businesses, as long as the recording is done correctly. However, one method can be more appropriate than the other. And in some instances, only one method is applicable to certain types of business models. Here are the key differences between the two;
Cash Method of Accounting – All transactions are recognized and recorded based on cash flow. Sales or income are recognized when the seller receives payment. Expenses are recognized and recorded when paid.
Accrual Method of Accounting – This method does not rely on the inflow or disbursement of cash. Sales and income are recognized and recorded when earned, expenses when accrued. So, if a sale is made on March but paid in June, the sale is recorded in the March books, not June. The same goes with expenses. The utility expense incurred in March but paid out in June is recognized in the March income statement.
Comparisons of Accounting Methods
Brisbane bookkeepers and accountants almost always recommend the accrual method of accounting. It is more accurate as it efficiently matches the income to the expense incurred in getting it. If the expenses are properly matched with the revenue, a more accurate income or loss statement is arrived. The accrual method is also the more systematic accounting method that can organize even the most complex enterprises. That is why established companies use the accrual method of accounting.
However, owners and managers should be doubly attentive to the financial statements. A good showing in the income statement does not always mean a good business standing. All recognized revenues could be tied up in other, not-so-liquid assets. So your business is earning but your cash level is low because all sales are in the accounts receivables. A company would also need to hire a trained and knowledgeable accountant or bookkeeper, or a team of such to competently perform the accounting.
On the other hand, cash basis of accounting also has its own advantages. Using this method, business owners have a more reliable understanding of the amount money leaving or coming into the business. It is also less complicated to use and apply in the business, and without the need of qualified accountants or bookkeepers to manage the books. Small and family owned businesses prefer this method.
There are also disadvantages in using the cash basis of accounting. As income and expenses are only recognized when paid, the method cannot present an accurate income statement. Business owners would also need to place stringent accounting controls as auditing is almost impossible in this method. The cash basis method will not be able to help in other business functions like sales forecasting, expansion planning, and other long-term goal planning.
Your accounting system should be designed to accommodate the needs of your company. Many entrepreneurs and non-accountant business owners start with the cash basis accounting. It keeps them more attuned to how the business is progressing. However, your business needs to be more organized and attentive to the details as it grows larger. Consult with your reliable bookkeeping team Link Bookkeeping to help you in the transition.