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Understanding the Difference Between Accrual and Cash

Do you know the difference between these two accounting methods? Know the difference as it may help you improve your business!
11 Nov 2020

Understanding the Difference Between Accrual and Cash Accounting

Are you using the wrong accounting method for your business?

If you don’t understand the differences between “accrual” and “cash”, you might be!

That’s why today we want to give you a quick overview on the differences, and pros and cons, between the two.

The biggest difference between these two methods?

Timing!

In an accrual business, revenue is counted the moment you send an invoice to a client

In a cash business, revenue isn’t counted until their payment for the invoice hits your bank account

It sounds like a small thing – but it actually makes a big difference!

Curious which one is best for you?

Well, cash accounting might be better for you if:

  • You have a small simple business with lots of in-person cash transactions

  • You need a clear and easy-to-understand accounting model that you can DIY and handle on your own

  • You only want your business to be taxed for what’s actually in your bank account (not projected in your books)

However, the more-popular accrual accounting method might be better for you if:

  • Your business model involves products and inventory

  • Your invoices (and expenses) aren’t paid right away, and you need to track A/R and A/P

  • You want a longer-term view of your business’ financial health and growth – not just what’s currently in your bank account

So I’m curious – which one is a better fit for your business?  And are you already set up with the correct method?  We would love to hear from you!

And, as always, feel free to reach out if you have any further questions we can help with!

(P.S. Still confused, but want to understand?  No worries – We have attached a video that breaks it down very clearly and more in depth. It is a little lengthy but it does a great job at explaining the differences in simple terms!)

Cash vs Accrual Accounting

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