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Accrual-Basis vs. Cash-Basis Accounting

Posted by Amrik Randhawa on June 25, 2012 at 4:43 AM

As a freelancer, solo practitioner, or small business owner, it is important for you to understand the two basic ways to account for the income and expenses of your business: the accrual method and the cash method. You must use one or the other, and the method you choose will determine how you track your income and how you treat your expenses for tax filing purposes.

The most common accounting method, and the method used by Kashoo Small Business Accounting, is the accrual basis method, where income is counted when your product or service is sold, not when you receive the payment. When recording the sale, you generate accounts receivable transaction that lets you know have a payment coming by a specific date. You record your expenses when you receive the goods or services from your vendor or contractor, not when you actually pay the expense. Your recorded expenses are tracked as accounts payable, so you know when and how much you must pay in upcoming bills due.

When using the accrual basis accounting method, you can run daily, weekly, or monthly reports from your Kashoo Business Dashboard to monitor your cash flow and help you to decide if you need a short-term loan from your financial institution to maintain business operations during lean or seasonal periods in your calendar year.

The accrual basis method also allows you to deduct expenses incurred in one tax year, even though you will not pay for the items until the next tax year, thereby possibly reducing your tax obligations Of course, you will want to consult with your accountant and tax attorney to ensure that you are in compliance for your particular business situation.

The cash basis accounting method is a little easier to manage, and many new freelancers and sole proprietors start out using the cash method, where all transactions are recorded when cash is received for sales or paid for expenses. The cash method is not applicable for situations where the business owner either buys items for the company on credit or extends some type of credit to customers. Many times, a business will buy products in one month and not sell them until the next month, and with the cash basis method, there is no functionality for recording these kinds of transactions. Most business owners eventually switch to accrual-based accounting to more accurately reflect actual revenues and expenses.

For a complete picture of your company’s finances, you need to be able to track revenues and expenses as well as know how much cash you have available in your bank accounts. Kashoo Small business Accounting uses the accrual basis accounting method, but also allows you to download your bank and credit card statements and upload the transactions into the appropriate line items—either manually or automatically. Your total financial history is available to you and your bookkeeper or accountant—continually updated and in real-time: simple bookkeeping at your fingertips.

For more information on how Kashoo Small Business Accounting offers you real accounting for your small business, even if your company is a “business of one”, take the Kashoo Tour or call us at +1-888-520-5274.

Topics: Accounting