If you’re a new business owner, you may hear the terms “cash basis” and “accrual basis” accounting and wonder what they mean and which you should use for your #bookkeeping. Let’s unpack both of them and see what they’re all about.

Cash Basis – You report expenses and income when “cash” has changed hands; expenses when you pay them and income when you’re paid. This may mean that to see how much money you have to work with, you just look at the balance in your business account.

Accrual Basis – You enter not just purchases and expenses, but also bills you haven’t paid and invoices your customers haven’t paid.

What does this mean? The cash method simplifies and streamlines the bookkeeping process, but you could be missing a big part of the picture. Such as how much money you’re owed and how much you owe. This could skew the numbers and show that your business is profitable and financially healthy, when you’re actually close to breaking even or possibly losing money because of all your outstanding debts.

However, the accrual method doesn’t necessarily track your company’s cash. So your company could look great through accrual reporting but have a huge cash flow issue because of too long a delay in getting paid for your services. This can cause a vicious cycle of not having enough funds to cover your regular expenses like payroll, utilities, etc.

Because of the potential issues with both, some companies use a blend of the two. Some industries lend themselves more to either one, so it’s good to consider that too when deciding what’s best for you and your company.

#rockelbookkeeping