Cash vs Accrual Accounting Methods
In any business, there are two major ways to record income and expenses. In an ideal scenario, the method to use may be at your disposal. The method to use depends on the timings and nature of the transaction. The difference between the two comes in on how you record all transactions. Let’s analyze the two primary accounting methods.
In cash accounting, all transactions are recorded when cash is received and accounted for in the form of the company paying for purchases or customers paying for goods received. If your business sells its products on credit, cash accounting cannot be implemented as there is no way to track money expected in the future.
Using cash accounting, it is easy to track the flow of cash. However, it becomes difficult to track individual revenues against expenses. This is because the goods you intend to sell at a later date could be in stock yet to be paid for.
If you are paying your income tax on cash basis, this could be the best option for you.
Accrual accounting requires you to record transactions as they occur. Credit sales are recorded in the accounts receivables until the corresponding payment is made. The same applies for goods you buy are entered as accounts payable until you pay for the goods.
With this system of accounting, you can keep track of all revenues against expenses but you cannot track cash transactions easily. Your income statement does not give the actual reflection of what you may have in the accounts.
To ensure that you have enough cash flow to finance daily business operations, it is advisable to do a cash flow analysis regularly. Alternatively, you can secure credit from financial institutions to manage your business ad you wait for payments.
It is easy to claim tax deductions for your business for a given period using your existing records in as much as you will pay for your expenses the next tax period.
Accrual accounting is the method accepted by most Financial Reporting Standards (FRS) because of its accurate timings and completeness of transactions at any point of time. But for a small business, cash accounting will be the an easier option because of its simplicity in the bookkeeping processes (See details for our accounting services in Singapore) and in most cases, the impact for not using accrual accounting will not results in material misstatement on the financial statements since the transaction volume tends to be much lower compare with the major players in the business.
For the sake of your business accounting records, cash accounting may not give a reflection of the assets and obligations you own or their value in running the business.
Regardless of the method used the most important thing you need to understand is what the records you have translate to and if you can use them to make key decisions. Contact Us today to understand more about our accounting services.