Know the difference between Cash and accrual in QuickBooks to use the suitable one when required saving time and enhancing productivity.
Understanding the difference between cash and accrual
It is very important to understand that what is the difference between cash and accrual methods if you are using QuickBooks for your business. No matter whether you are taking care of the financial reporting by yourself or not, it is of great importance to know how each method works. It will help you to select the best practices of bookkeeping for your business to flourish.
- 1 Understanding the difference between cash and accrual
- 2 What does Cash Method stand for?
- 3 Meaning of Accrual Accounting
- 4 Which method suits best for Small Businesses
- 5 FAQs
What does Cash Method stand for?
Cash basis method allows you to get the income recorded in the form it is received and the expenses in the form they are paid. Accounts payable or receivable are not counted here, because it applies only to the payment which is made by the clients, during cash in hand and the expenses when transactions gets clear from the bank account of yours.
If we go with an example, then consider that if a client is invoiced for $2,000, dated March 1 and payment is received on 15th April then the income will be recorded in the bookkeeping of April as this is the time when money was received, that too in hand.
Most of the owners of small business prefer the cash method for accounting, as this method is one of the simplified process of bookkeeping. Money could be tracked easily because it keeps on moving out and in of the bank account of yours and this is the cause that recording of payables and receivables is not needed.
Also, the small business does not have to pay the income taxes incurring on any of the revenue, till the time it is deposited in your bank account.
There is a drawback too of using the cash basis method of accounting, because it can sometimes create the inaccurate or wrong picture of the overall finances of yours. As, it does not account for overall outgoing expense and incoming revenue, hence you may lead to thinking that cash-flow of the month is very high, when in real that will be the result of the work done in last month.
Meaning of Accrual Accounting
Accounting done on accrual basis is completely opposite to what is done in cash method. Expenses and income get recorded when they are either earned or billed, irrespective of the money which was received actually. If we use the same example as we quoted above then by applying the accounting of accrual basis, say you will record $2,000 as the income in the March month’s bookkeeping versus in the April, when actually the funds were received by you.
By using the accrual method, owner of small business will be able to get realistic and better idea of the expenses and income during that certain time-period. By doing this, you will be able to get a better and clear idea of how your business is going and where it can head in future.
One problem with accrual method is that funds or cash flow are not accounted by it, which are available in the bank account of yours. If bookkeeping is not done by you properly and practices you follow for it are not appropriate then chances are that accrual-based method of accounting can prove to be financially bad for the owners of small business, because large revenue will be reflected through your books, whereas the bank account you own will be empty completely.
Which method suits best for Small Businesses
Now let’s just have a small comparison between which method is best for the small business.
Method of cash accounting is comparatively easy if we do the comparison between two, because it is straightforward and does not involve any complexities. Whereas in accrual method, you have to do more of bookkeeping as you have to anyhow do more of tracking and recording.
If you own a small business then you can choose any method out of the two, as long as the sales does not exceed $5 million in a year. If in case, you keep an inventory of the merchandise with an intent to sell it to your consumers then accrual method should be used by you.
Cash methods allow you to have the better and clear picture of the funds that are in the bank account, whereas accrual method will help you to keep the account of the money which hasn’t come yet. With cash basis you can immediately have a look on the financial picture of your business and accrual method on the other hand, helps to have a long-term view.
Hybrid method can also be chosen by some of the business for accounting purpose. They use the accrual-based accounting method for the inventory and use cash method for the expense and income.
Issues faced by the Users
If you are confused and unable to decide which method you should opt for, which is quite common then without thinking twice just dial our smbaccountants.com and talk to our QuickBooks helpdesk. SMB QuickBooks tech support team will ensure that your issues and queries are answered timely.
What do you mean by Accrual Accounting?
Accrual Accounting is used to recognize and record revenue and expenses. It includes accounts payable and accounts receivable. It is more accurate and often used in publicly traded companies to streamline the earnings over time.
What do you mean by Cash-based accounting?
Cash basis accounting is simple. In this, revenue is entered instantly on the time when your Cash is received. The cash method is more favorable in personal finance and small businesses.
What is the primary difference between Cash basis and Accrual accounting?
The difference between cash basis and accrual accounting depends upon the timing of the recorded revenue and expenses. Cash-based accounting is an immediate action, whereas the accrual method depends upon the anticipated expenses and revenue.
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