Why It Is Important For Small Businesses To Choose Between The Cash Or Accrual Method Early On
ShareIf you own a small business, there is a good chance that you are doing the book keeping yourself. Many start-up companies choose to do their own accounting to save money. Even though it is probably better for your company to hire a professional, if you prepare your books properly from the start, you should be able to successfully manage your own finances. One of the most important things is choosing early on if you will use the cash method or accrual method. Here is what you need to know about both.
Cash Method
When you use the cash method, you record the income that your company brings in when it was received. For example, assume that you are a dentist. You do work on a patient in the month of September, but the patient doesn't pay you until October. If you are using the cash method, then you wouldn't record any of those services until October because that is actually when you have the money in hand. This kind of method works well for people who aren't sure if they are going to get paid for their services. If you run a business where you have a lot of outstanding balances from clients, the cash method may be better. This is because you will get a more realistic idea of how much money you are making.
Accrual Method
The accrual method is different than the cash method in that you record the money not when it was received, but when you earned it. For instance, you might own a store where you allow people to buy their goods on credit. So a client might purchase a bulk of goods in April, but they don't settle their bill with you till the end of May. Although you don't actually have the cash in hand in April, you would count the sale made in April and the income earned in that month. This method then counts income based on when it was earned, not when it was received.
If you don't decide early on what kind of method you will be using, you might record things twice. You may put down that you earned $100 in April, then record it again when someone settled their bill in May. This is why it is so important to decide which method is for you before you actually start your business. This will keep your books evenly balanced.
For professional accounting services, contact a company such as Teri J Henderson, CPA, P.A.