Cash Vs. Accrual

Cash Vs. Accrual Accounting Method... Which one should my business choose?

In most cases if you own a small business you are free to choose which method you would like to use for your small business. In most instances these methods differ only in timing of when the transactions are credited or debited to your account.

So lets break down each method

Cash Method

The cash method is most commonly used in small businesses. Income is accounted for when it is actually received and expenses are accounted for when they are actually paid.

Example: You own a consulting business and render services in April. You do not receive this money until June. Under the cash method you would record the sale of these services when the check or cash is received in June.

Accrual Method

In the accrual method of accounting income is accounted for when services are rendered and expenses are accounted for when you receive goods or services. In this method you do not wait until you receive the money or actually pay for a good or service before you record a transaction.

So how do you choose a method?

Most small businesses with sales of less than $5 million a year can adopt either accounting method.

You must use the accrual method if:

your business has sales of more thatn $5 million a year or your business stocks an inventory of items that you will sell to the public and your gross receipts are over $1 million per year