Cash Accounting
Cash accounting tracks the actual money coming in and out of your business. It is based on when the money physically goes in or out of your account.
In cash accounting:
- When you get an invoice – you don’t record the cost in your books until you have paid the invoice
- When you send an invoice – you don’t record the sale in your books until they have paid the invoice
For example, if you create and send an invoice on Monday and don’t receive payment until Friday, you will record the income on Friday in your books.
Pros & Cons of Cash Basis
- It is a simple system that will keep track of your cash flow in real time
- Suits a smaller business that mostly has cash transactions
- Gives you a picture of how much money you have in your bank account
However, it does not show money that is owed, or is owing.
Accrual Accounting
If you use accrual-based accounting, you will record expenses and sales when they take place, instead of when the cash goes in, or out. This way of accounting shows the amounts you owe, and the amounts owing to you.
For example, If you send an invoice for a project you have completed, you will record the sale in your books regardless of if you have been paid or not.
Pros & Cons of Accrual Basis
- It is more complicated than cash accounting
- It suits businesses that don’t get paid straight away (providing a service like building, and invoicing later)
- Tracks your true financial position – showing you money owed and owing
- It is helpful when dealing with many contracts or large amounts of money
Choosing a method
To work out which method would most suit you – we recommend having an in-depth conversation with your accountant. But to also think about:
- The size of your business
- How complicated are your business transactions and processes?
- Do you have the resources to manage accrual accounting?
- Using a cloud-based accounting software or not, will make a difference