Why Cash Versus Accrual Accounting Matters for your Business

Original article posted at Design Manager.

Whether you have a brand new business or an established business, you have been faced with a choice of how to report your business expenses and income.  It may have been an easy decision for your company because of the nature of your business, but many small business owners labor over the decision.  When reporting your business expenses and income you have two choices: cash or accrual accounting.  In this article, we will help you understand the basics of the two reporting methods, the reasons why accrual accounting is more popular and how Design Manager follows accrual accounting.

The Cash Method

With the cash method of accounting, you record income only when you receive cash from your clients. Similarly, you record an expense only when you write the check to the vendor.

Most individuals use the cash method for their personal finances because it's simpler and less time-consuming. However, this method can misrepresent your income and expenses, especially if you extend credit to your clients, if you buy on credit from your vendors, or if you keep an inventory of the products you sell.

The Accrual Method

With the accrual method, you record income when the sale occurs, whether it be the delivery of a product or the providing of a service, regardless of when you get paid. Likewise, you record an expense when you receive the bill for goods or services, even though you may not pay for those goods or services until later.

The accrual method gives you a more accurate picture of your company's financial position than the cash method because you record income on the books when it is truly earned, and you record expenses when they are incurred. Income earned in one period is accurately matched with the expenses that correspond to that period so you see a clearer picture of your profits for each period.