Greetings! Today we’ll be talking about two of the most popular accounting methods: cash basis and accrual basis. Many business owners scratch their heads when trying to decide which method will work best for their business, and how they should set up their accounting software, like Quickbooks Online. At Moose Creek Bookkeeping, we are well-versed in all things accounting and we are happy to share our knowledge with you. Let’s dig into cash basis vs. accrual basis.
Cash Basis Accounting:
Imagine you run a small bakery, and you sell a batch of delicious cupcakes today. With cash basis accounting, you’d record the sale when your customer pays you, and not a moment before. It’s a simple approach that focuses on actual cash inflows and outflows. Perfect for businesses with straightforward, day-to-day transactions, this method is like keeping a close eye on your wallet.
The pros of this method include the simplicity of it as well as the real-time picture it provides. You get a clear view of your actual cash flow, which helps you manage short-term financial needs effectively.
Conversely, as comfortable as cash basis accounting might feel, it doesn’t give you the whole financial story.
And for long-term projects, cash basis accounting might not reflect the project’s real financial status, making it a bit like trying to bake those cupcakes with missing ingredients.
Now, let’s talk about accrual basis accounting.
Accrual Basis Accounting:
This method goes beyond cold, hard cash and considers transactions when they are earned, regardless of cash movements. It’s like having a crystal ball that predicts your financial future.
Accrual accounting provides a complete and accurate snapshot of your business’s financial health. It accounts for both present and future income and expenses, offering you a well-rounded picture. For long-term projects, accrual basis accounting is a shining star. It helps you track revenue and expenses over time, giving you valuable insights into your project’s profitability and financial performance.
However, accrual basis accounting might feel a little intimidating, as it requires a bit more accounting know-how and organization. Oddly, with accrual accounting, In the short term, your cash flow might not line up with your reported income or expenses. This can be a tad tricky to manage but remember, understanding the difference is key.
That’s where we come in. We can discuss the pros/cons of cash basis vs. accrual basis for your business, and get you on the right track for proper finance management for your business. Moose Creek Bookkeeping has been helping businesses just like yours understand and master these principles. Our holistic approach and long-term insights will guide you to make sweet financial decisions and keep your projects on a path to success.
Reach out to Moose Creek Bookkeeping at any time for a no-obligation discovery call.
