Should a Small Business Use Cash or Accrual Accounting?

When it comes to accounting, there are two common basis of accounting: cash basis and accrual basis.

Cash basis is the easiest. You record cash when it is received and when it is spent. It’s that simple.

You may be thinking, “Great! I’ll go with cash basis.” Well, not so fast. As this article points out, “cash-accounting systems are appropriate for the smallest businesses, with limited transactions and not much need for analysis.”

Analysis under cash basis accounting is limited because it doesn’t “match” expenses with the revenues. Because of this, it is difficult to compare one month’s financial statement to another month.

The article goes on to say:

“If you...have an interest in growing your business, then you should make the switch to an accrual-accounting system. Accrual accounting makes a better effort at matching revenues and expenses”

If you have no intention of moving your business from a sole proprietorship or you’re not interesting in growing the business, or selling the business one day, then stick with cash basis.

Accrual basis accounting may be required for some of the plans you have for our business. For example, if you want a bank loan or line of credit, the bank will require that you maintain your books using “generally accepted accounting principles” (GAAP). Cash basis is not considered GAAP, but accrual basis is. If you plan to sell your business one day, the buyer will most likely want your accounting to be in accordance with GAAP.

Still wondering what is best for your business? Contact our team at hello@basis365.com for some expert advise and a review of your accounts.