Cash vs. Accrual Accounting: Two Main Differences For Businesses To Consider

0
Comments

 

"Accounting is the language of business." -Warren Buffett

Let's look at a few differentiators between the two and how each could help, or hurt, your business moving forward.

As always, please let me know if you or your accounting team has any questions on this topic. I would love to help in any way I can, or provide resources for further understanding. My goal is for your business to succeed!

Timing

The key difference between cash and accrual accounting is largely due to timing.

For instance, cash accounting considers revenue right when the cash is received, and right when you pay expenses. Many businesses opt for cash accounting because it's easier to keep track of -- it's a simple method especially for entry-level accountants to maintain.

On the other hand, accrual-based accounting keeps track of earnings as opposed to what's actually been received. Although cash accounting is simple, accrual is more popular because of this timing: businesses consider revenue upon "project completion" instead of waiting to receive the money.

Taxes

There are tax implications depending on which method you choose. (Again, I would love to help you here!)

The most obvious tax change, between cash and accrual accounting, is in what year the taxes will apply to any given business. A primary example using accrual: invoicing a client in December means the transaction occurred in 2019, even if you don't get paid until January 2020.

Your accounting team should decide on a method that best suits you, but it's important to be consistent in whichever you choose. Also, note that some businesses are REQUIRED to use accrual accounting.

Not sure if you fall into that camp? Reach out and let's discuss your options.

Lastly, you'll need to file Form 3115 if switching accounting methods. It's not too difficult, but it is necessary.

Make sure you give this issue its rightful attention, or it could come back to haunt you -- even if accounting already shows up in your nightmares. :)

Can other accountants say that?

BE THE ROAR not the echo®


Warmly,

Janet Behm
Utah Real Estate Accountants
(801) 278-2700



Tags



Comments



Add a Comment: