Which is better: cash basis or accrual basis?

The real question is which is most appropriate to your business!  Both have value in the right situation.

Cash basis accounting is best used for personal finance and microbusinesses.  This is the method that chronicles transactions as they occur.  No invoices are recorded until they are paid, no bills are documented until the money is spent.  If no money moves, the transaction is not documented.  It is the best tool for these situations.  If the only question you want to ask is, do I have the money to pay for this right now?” or “Are you paying for this right now?” then this is the method for you.  

What this means is that when you report your income for taxation purposes, the IRS will want your cash accounting for the date it occurred.  In other words, if you sell a monthly service from June to June and your customer pays upfront for the whole year – the revenue for that sale would only be reported for the first year, not the second… because that is when you received the cash.  The same goes for each expense transaction

Simple and straightforward, no muss, no fuss.  

Accrual basis accounting will match revenue with expenses; and is generally required when your business has inventory.  Once you reach a certain level of complexity, this becomes a requirement by the IRS.  In general, if you have inventory or use accruals to report income or your expenses, you should be using the accrual method. 

Not simple, or straightforward, but quite useful in the data it generates on your business.  By knowing a more three-dimensional view of your business, you have more clarity to make the decisions that won’t have hidden consequences or unforeseen fall-out.  

References

IRS Publication 538 (01/2019), Accounting Periods and Methods, rev. 01/2019.  Retrieved from: Publication 538 (01/2019), Accounting Periods and Methods | Internal Revenue Service (irs.gov) 

8 thoughts on “Which is better: cash basis or accrual basis?”

  1. I believe that is one of the so much important info
    for me. And i am happy studying your article. But want to remark on some normal things, The web site style is perfect, the articles is truly great :
    D. Good task, cheers

  2. Howdy! This blog post could not be written much
    better! Going through this article reminds me of my previous roommate!
    He continually kept preaching about this. I most certainly will send this article to him.
    Pretty sure he’ll have a great read. Thanks for sharing!

  3. It’s actually a great and helpful piece of information. I
    am happy that you shared this useful information with us.
    Please stay us up to date like this. Thanks for sharing.

  4. A person necessarily lend a hand to make significantly articles I’d state.

    That is the very first time I frequented your website page and up to now?
    I amazed with the research you made to create this particular put up amazing.
    Excellent job!

  5. I’ve been browsing on-line greater than 3 hours as
    of late, but I by no means discovered any interesting article like yours.
    It’s beautiful price sufficient for me. In my view,
    if all site owners and bloggers made excellent content as you
    did, the internet will probably be much more useful than ever before.

  6. I got this web page from my pal who told me regarding this web page and
    now this time I am browsing this web site and reading very
    informative posts at this place.

  7. Have you ever considered about adding a little bit more than just your articles?
    I mean, what you say is important and all. However think of if you added some great images or videos to give your
    posts more, “pop”! Your content is excellent but with images and video clips, this blog could undeniably be
    one of the most beneficial in its niche. Good blog!

Comments are closed.