CASH OR ACCURAL ACCOUNTING

Not sure what method you should use to manage your books, or which one is best suited to your business? Here’s a quick guide to help you understand cash and accrual accounting, and the pros and cons of each method.

CASH ACCOUNTING

Cash accounting tracks the actual money coming in and out of your business.

In cash accounting, if you get an invoice for something, you don’t record the cost in your books until you’ve paid the invoice. Similarly, when you send an invoice to a customer, you don’t record the sale in your books until you receive the money from the customer.

For example, if you send an invoice on Tuesday, and don’t receive the payment in your account until Thursday, you record the income against Thursday’s date in your books.

ACCURAL ACCOUNTING

If you use accrual accounting, you record expenses and sales when they take place, instead of when cash changes hands.

For example, if you’re a builder and have sent an invoice for a project you’ve completed, you record the sale in your books even though you haven’t received payment yet.

This way of accounting shows the amounts you owe to people and the amounts owing to you.



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