Let’s keep this simple: You’ve got two main ways to keep track of your money—cash accounting and accrual accounting. Which one is right for you? Well, it depends on how your business operates. Let’s break it down.
Cash Accounting
Cash accounting is the “pay-as-you-go” method. You only record income when the money actually hits your bank account, and expenses when you pay the bill.
Example:
You sell $1,000 worth of cupcakes on credit today, but you don’t get paid until next week. In cash accounting, you wouldn’t count that $1,000 until it’s in your account.
Pros:
• Simple: You see exactly what money you have at any given time.
• Great for small businesses with simple transactions.
Cons:
• It might give you a false sense of security. You could look like you have plenty of cash, but have a bunch of unpaid bills hanging over your head.
Accrual Accounting
Accrual accounting records income when you make the sale, even if you haven’t been paid yet. It also records expenses when you receive the bill, even if you haven’t paid it yet.
Example:
With accrual accounting, that $1,000 cupcake sale is recorded today, even though the cash won’t hit your account for a week.
Pros:
• More accurate: It gives you the real picture of your business’s health. You know what’s coming in and going out.
• Good for growth: This is what most larger businesses use.
Cons:
• More complex: You have to keep track of money that hasn’t actually moved yet.
So, Which One Is for You?
If you’re a small business with straightforward transactions—say, a dog walker or coffee shop—cash accounting might be all you need. But if you deal with a lot of credit or have big plans to grow, accrual accounting might be better.
The Bottom Line
For most small businesses, cash accounting is the easier route. But if you want a clearer view of your overall financial picture, think about switching to accrual. If you’re not sure, talk to an accountant to get their take.