Running a small business is not a small task. However, good accounting practices can help small business owners to manage their finances, stay organized and keep a good record of expenses and revenues. It means that while the company itself doesn't pay corporate tax, shareholders must still pay personal income tax on their share of the profits.
What are the Best Accounting Methods for Small Businesses?
By Reema Rajani, founder of Adcon Business Solutions
Running a small business is a challenging feat, and with limited resources and tight budgets, it’s critical that you establish the best accounting methods to ensure accurate financial management. Having a sound accounting system in place is essential for tracking your income and expenses while managing cash flow.
The two most common accounting methods small businesses use are the cash and accrual-basis methods. While both have advantages and disadvantages, you should choose the one that best suits your business needs.
This article will explore the differences between cash and accrual-basis accounting and which one is best for your small business.
Cash Basis Accounting
Cash basis accounting is a way to manage income and expenses by tracking the money that comes in and out of a business. It records when cash is actually received or paid instead of when it was earned or incurred. This makes cash basis accounting a simple option since it only requires you to keep track of when money is exchanged.
This method works well for businesses with limited cash flow and a small number of transactions since it requires no additional records other than what is recorded in the company’s bank account. Another benefit of cash basis accounting is that it helps to keep track of cash flow quickly and easily.
Benefits of Cash Basis Accounting
- Easy to understand and use as it only requires tracking the amount of money that comes in and out.
- Provides a quick snapshot of your cash flow that enables you to make better financial decisions.
Cons of Cash Basis Accounting
- Will not provide an accurate picture of a business’s performance since it does not take into account expenses that have been incurred, but not paid.
- Does not provide any insight into the long-term financial health of the business as it only tracks current transactions and does not track liabilities.
Accrual Basis Accounting
Accrual basis accounting is a method that records income and expenses when they are incurred, regardless of whether money has been exchanged. It means that transactions are recorded when services are provided, or goods are sold.
Accrual basis accounting is more complex, as you must keep track of all invoices and bills associated with each transaction. This method is typically used by larger businesses that have more complex transactions and larger cash flows.
Benefits of Accrual Basis Accounting
- It provides a more accurate picture of a business’s financial performance, as it considers expenses that have been incurred but not paid.
- It provides insight into the company’s long-term financial health by tracking current transactions and liabilities.
Cons of Accrual Basis Accounting
- If done correctly, it becomes easier to track cash flow issues. Also, due to its complexity, it may require additional costs for bookkeeping services.
- It may be more time-consuming as it requires monitoring invoices and bills associated with each transaction.
Which Method is Best for Your Small Business?
The best accounting method for your small business depends on various factors, such as the size, type, and complexity of transactions. Generally speaking, cash basis accounting is best for companies with limited cash flow and few transactions, while accrual-basis accounting is best for larger businesses with more complex transactions.
Ultimately, the choice comes down to evaluating the needs of your business. If you need a quick snapshot of cash flow, or if you have fewer transactions and a limited cash flow, then cash basis accounting is likely the best for you. However, if you need to track transactions closely or have a more complex business, then accrual basis accounting may be the better option.
Wrapping it Up
At the end of the day, the best accounting method for your small business depends on your own needs and preferences. Consider both the pros and cons of both cash and accrual basis accounting, evaluate the needs of your business, and make an informed decision. Whichever path you choose to go down, understanding the basics of accounting is essential for any small business.
It might be also a good time to consider professional help. Adcon can assist with all of your accounting needs, regardless of business size. Call us today!
Reema is the founder of Adcon Business Solutions. She has spent over 20 years helping businesses with their accounting and bookkeeping needs. Reema is a QuickBooks® Certified Pro Advisor. She has the experience and knowledge in Cash Flow Management, Payroll Processes, Sales Tax, Account Reconciliation/IRS representation, and Budgeting to help your business.
Adcon Business Solutions, Inc.
Adcon Business Solutions, Inc provides services in:
- Bookkeeping and Accounting Software
- Tax Services
- Cash Flow
- Controller Services
- Business Tax Services
- Individual Tax Services
Adcon Business Solutions provides onsite service to the following areas of California: Inland Empire, Orange County, LA County, San Bernardino, and surrounding areas. And we also provide remote services to clients within the US.
To learn more about our services, give us a call today at (714) 369-5859 or (909) 896-8005!