Running a small business is an exciting and thrilling endeavor. Aside from being your own boss, you get to chase after things you’re passionate about and create something that benefits people.
That said, entrepreneurship can also be overwhelming. As a small business owner, you may often find yourself wearing too many hats at once, especially during the first days of your venture. You need to oversee your team’s output and performance while also managing your own tasks. On top of that, you also need to write various business plans and find the right accounting method for your business.
Choosing the most suitable method for your venture is an essential task, but it can seem daunting at times. The good news for you is that you only have two accounting methods to choose from: accrual-based accounting and cash-based accounting.
To help you to make the right choice, we’ll break down the key differences between these two methods in the sections below.
In accrual accounting, revenues are recorded when they are earned, regardless of whether the money is actually received or not. In the same way, expenses are also recorded the moment a product or service is received, regardless of whether the amount is paid or not.
This method is more commonly used than the cash method as it allows owners to assess whether the business is performing well or not. It lets owners see sales and purchases as they happen, enabling them to make better financial decisions.
Benefits of Accrual-Based Accounting
Here are some benefits of accrual accounting:
- Easier Planning and Forecasting – This method gives owners a more realistic picture of the business’ finances during a particular period. With this, they can create budgets and sales forecasts that are more sound.
- Simpler Taxes – Accrual accounting lets owners issue invoices at the start and end of the year, making it less complicated to file taxes.
- More Favor in the Eyes of Investors – Investors view businesses using this method as more established than those that use cash accounting. If you are planning to enter a funding stage, this can help you get better results.
Unlike accrual accounting, this method does not recognize accounts receivable or accounts payable. Cash basis accounting only records revenues or expenses when money is actually received or paid.
As it is quite simple to maintain, this method is commonly used by farm businesses as well as small businesses that are not inventory-heavy. It tracks finances as they come in or out, enabling business owners to see how much their business has at any given time.
Benefits of Cash-Based Accounting
Here are some benefits of cash basis accounting:
- A Better Idea of Current Finances – One of the biggest advantages of this method is that it gives entrepreneurs a clearer picture of money going in and out. This allows them to understand where they are in terms of finances in real-time.
- Easier Tax Filing – In this method of accounting, taxes are only paid on money that has been received. This makes tax filing significantly easier.
The main difference between these two accounting methods lies in how and when sales and purchases are recognized. The accrual method mainly presents anticipated revenue and expenses, while the cash method recognizes transactions only when money is received or paid. The latter is simpler and easier; however, the former presents a more accurate picture of a business’ health. If you are not quite sure what suits your company the best, hiring small business accountants is a smart move.
If you are searching for the best accounting services for small businesses in Ontario, look no further than Measured Growth CPA. We are dedicated to helping your business grow through our expertise and client-driven service. Get in touch today and let’s start working together!