As an accounting major in college, I quickly learned all of the complicated parts of the accounting cycle. I discovered how to input the details of business transactions into a computerized accounting system. At the end of an accounting cycle, such as a month, I became experienced with calculating the revenue for the period. If you’re starting a new business, determining an accurate amount of revenue for each accounting cycle is crucial. You must know how much profit you’re making each accounting period in order to be successful in the long-term. On this blog, you will discover how an experienced accountant can help you keep track of your revenue.
In the world of accounting, there are two ways to deal with the money you have coming in and going out. The first method is called cash-basis, and the second one is known as an accrual. Those terms mean a lot to the folks at certified public accountant firms, but you'd be forgiven for not knowing the ins and outs. Here's what you need to know about cash-basis versus accrual.
Cash-Basis
The idea behind cash-basis accounting is that nothing shows up on your books until the money either comes or goes. If a client owes you for work you did in December 2019 and didn't pay you until March 2020, for example, then the payment shows up on the books for the 2020 tax year if you're using a cash-basis system. The same idea applies to anything you owe to someone else.
One major plus of cash-basis accounting is that it keeps things simple. Especially if you're running a small business or a sole property, you may not want to spend a ton of time keeping tabs on inflows and outflows.
A big downside to this approach is that the federal government frowns upon it. This is because cash-basis accounting is easy to manipulate. Consequently, that opens up some degree of audit risk. Most certified public accountants encourage their clients to most away from cash-basis accounting as soon as possible.
Accrual
The idea behind accrual accounting is that receipts and expenses go on the books once some part of the job is done. If a contractor completes a job for a customer, the value of the work goes into the records as soon as the project is finished. It's very possible the customer may still owe part or even all of the value of the work because a bill is pending.
Similar logic applies to expenses. If you receive materials from a supplier but haven't paid for them yet, those expenses go on the books right away.
The main advantage of this approach is that you'll keep up with developments as they happen. Also, folks using accrual methods can carry some of their expenses forward if they don't owe taxes. This can help a company reduce its tax bill for later years, an especially useful thing for companies that are growing.
Most businesses end up using accruals. Unsurprisingly, folks making the transition from cash-basis to accrual usually hire certified public accounts to help them straighten things out and implement processes.
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