Cash Basis Or Accrual Basis Accounting
I have many clients that are unsure about what to use for their business bookkeeping a cash basis or an accrual basis standard of accounting. The only difference from these too types are when the money received or payment made are credited or deducted from your accounts. In cash basis you deduct or credit immediately once the payment is made or received in accrual it is only deducted or credited with the service is completed or the payment is actually paid out.
Here are a few examples first lets start with credits. Let’s say a wedding photographer books a wedding and takes 50% up front a $1000.00 deposit but the wedding is not for another 8 months. If the photographer was using cash basis accounting the $1000.00 would be counted on their books as soon as the deposit was received and the remaining balance when it is received in 8 months. If the same photographer was using accrual basis accounting then he would not count the deposit in his books until the services where completed even though he took the deposit, so in 8 months he would post $2000 in his books.
The same applies for payments, lets say the photographer in our last example buys a new camera and uses credit to buy it and pays off the camera in 2 months. With cash basis accounting he debits the cost of the camera in his books immediately when the purchase is made. If the photographer is using accrual basis accounting he debits the cost of the camera in two months when he actually makes the payment.
In conclusion both methods are going to result in the same outcome. With accrual basis you are going to have a better picture of your business income and debts but your cash reserves will not be as clear. With Cash basis you have a clearer picture of cash reserves but overall profitability of your business over time may not be as clear.