When referring to accounting methods, we are talking about the ways in which financial records are kept by businesses, which are used to make their financial reports for each quarter. You can use both accrual and cash methods for keeping records of financial transactions for business. If you run a small business, it would help you to determine what method you want to take advantage of, factoring in sales volumes, the presence of customer credit, and IRS tax requirements.
In order to stay abreast of tax laws, you have to keep records of your finances. Also, managers can use this information to learn how the company is doing money-wise, which will help them make decisions on its future. While you can switch up accounting methods down the road, it helps things along much better if you pick the right one from the beginning and stick with it, so weigh your options carefully.
Cash basis accounting records focus on how cash flows in real time, factoring in how income and expenses are calculated with that method. Once you physically get funds into your account, that is recorded as income, instead of just recording when you earned it. Expenses, on the other hand, are factored in when the money actually leaves your hands, instead of when they are ‘spent’. With the help of this accounting method, you can delay billing if you like, so you can place it in the following year and hedge your bets with the IRS, or pay things earlier to avoid later trouble.
You can get a lot of benefits with the cash method; namely, compared to accrual method, it is a far easier to look at, it gives you a much better idea of how your finances are doing, and you do not have to get taxed on certain expenses till the following year. Due to the fact that you are altering the times at which you pay and take in money, though, you might tend to adjust details of how your company is doing financially, which can be misleading. What’s more, accrual methods work harder to show when you actually spend and took in money.
With the accrual system, when you earn the revenue you record it, and when you spend money you record it. It does not matter when the money actually leaves your hands, just when you made the intention of spending or taking it in. While accrual methods give you a better idea of how your company acted in the financial year, and it gives you an idea of the bigger picture, it is a lot harder to figure out than cash methods, and you would have to pay income taxes on revenue before you even get it.
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Originally posted 2013-03-01 15:42:09.