Each accounting method comes with pros and cons. The method you choose will impact how taxation is reported and your overview of your business’ financial situation.
If you’re a large and complex business, accrual accounting will give you a better understanding of your business’s revenue. For example, a marketing company may be paid periodically based on the percentage of work performed or compensation could wait until the entire project is completed. Financial institutions and investors may view this accounting method more favorably because it gives a better overview of its revenue and expenses in the long-term.
Cash accounting method is ideal for small businesses which prefer a straightforward way to measure income and expenses. However, revenue won’t appear on the ledger until the payment is received.
Nevertheless, businesses looking to combine the two methods can opt for modified cash-basis accounting. This allows them to view short-term cash transactions and long-term financial transactions related to their business.
Bottom Line
When choosing an accounting method, be sure to educate yourself on its implications. The ideal method should provide you with an understanding of your business’ financial health and transactions. To help make the process easier, businesses often choose to use accounting software. For more information, check out our guide on the best accounting software for small businesses.
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