Cash Vs Accrual Accounting For Small Businesses

My physics teacher in high school always said, “Use the KISS method, Keep It Simple, Stupid”.

Cash Vs Accrual Accounting is a topic that I will continue to discuss because there is no quick and simple answer. Accrual accounting may be G.A.A.P. (Generally Accepted Accounting Principle) but it is not always best for cash management for a small business. For small businesses especially for a services like web design or a law firm, you really can not recognize income until you get the cash. Some of my clients have clients that have yet to pay them for services so they cannot recognize a sale. A retail client who has cash sales is most definitely on a cash basis. There is no accounts receivable. For accounts payable, that is pretty synonymous with the Unpaid Bills Report in Quickbooks, but only if a business enters bills as they come in and does a weekly or periodic check run. Otherwise, you pay bills as they come in, and that is good practice so that you don’t miss payment deadlines. What I have found to be a problem with Quickbooks is that you have to commit to one method or another, or when you switch, transactions can sit in a queue waiting to be cleared.

The bottom line is that small business accounting is a mix of cash vs accrual accounting. Apply the right method to manage your cash conservatively while keeping your taxable income minimized is a challenge but it can be done.


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