Small business accounting – Cash vs Accrual – Does it matter? Yes it Does.
It is not uncommon for us to receive financial information from business owners where for instance the tax returns are done on a cash basis and the financials are done on accrual basis. Often they are technically both correct but just looking at the numbers you’d think they were 2 different businesses.
Accrual accounting, done coreectly, usually presents a more accurate picture of the business. Accrual accounting simply attempts to match the revenue to the expenses when they are incurred or earned. Cash accounting simply accounts for the revenue or expenses when you recieve the cash or pay the bills.
In reality, cash accounting is almost never pure nor is accrual accounting.
Some (many) small business owners don’t understand the difference nor the effect on their financials. One way to sort out the difference is really easy. In QuickBooks and most other small business accounting packages there is a check box for reports. You can decide if you want accrual or cash. I suggest you run both on the same day and look at the differences. You might be surprised at what you learn.
Also, look at Expense to profit Cash Conversion Process for more info on working capital and cash management.
Other Articles about Running a Small Business: