Business Accounting Methods : Cash Vs. Accrual Essay

1420 Words6 Pages
Using the wrong accounting method There are two main business accounting methods: cash vs accrual. Cash accounting is the much simpler method and the method that most small start-up businesses will use because it is based on the actual flow of your cash in and out of the business. Cash basis accounting does a good job of tracking cash flow, but it does a poor job of matching revenues earned with money laid out for expenses. This deficiency is a problem, particularly when, as it often happens, a company buys the inventory in one month and sells that inventory in the next month. Accrual accounting simply means that it just disregards the actual exchange of cash and records income and expenses as they occur. Accrual accounting is the method to use if there will be any form of accounts receivable or accounts payable. If you are using the wrong accounting method for your business it is likely to cause big problems with your accounting, profits and yes, even those dreaded taxes. Example of cash vs accrual: • A customer comes into your repair shop and needs front and back brakes and rotors. Under the cash method, you do the repairs and the customer hands you a credit card (or check or even a stack of cash). You record it into your point of sale system and the money is recorded as revenue. But if the customer has an account with your business and doesn’t hand you the money until the beginning of the next month the transaction will not be recorded as revenue until
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