Cash vs Accrual - Which Accounting System is Right for You

Changing Systems May Help to Grow Your Business

In past articles we have talked about outsourcing your accounting services . We still recommend that. You need to focus your activities on your core business, which does not include doing your own accounting, however, we do need to talk about which type of accounting system you are using.

When you are first starting up your business or have been in business for a while, you may have started keeping your books using a cash based accounting system. This system is fairly easy to use and records financial transactions when cash changes hands. It keeps track of what cash you have on hand very well, but does not do well keeping track of future sales or long term payments. Depending upon how much business you are doing, you may need, or want to shift your system to an accrual accounting system.

An accrual accounting system is a "real time" accounting system. Financial transactions are recorded as they happen. As you might guess, a lot more time is required to manage this type of accounting system. We most emphatically suggest that you outsource this activity. Using this type of system provides infomation that can be used to indicate sales forcasts, key performance indicators, and financial reports.

The general set of accounting principles, standards and procedures that companies use to compile their financial statements, commonly called GAAP, require businesses that have $5 million in annual sales or $1 million in inventory sales to use an accrual method for their accounting system. The accrual method is also the preferred method for businesses that wish to significantly grow.

If you have any questions regarding cash or accrual accounting systems, please contact the Tax Office, Inc. Our specialists would be happy to answer any questions you may have. If you have any questions regarding outsourcing your accounting, bookkeeping or payroll services we would be happy to help you.