What is cash basis and accrual basis accounting?
Cash basis accounting records income and expenses when the physical cash transactions happen. With accrual basis accounting, the transactions are recognized when the income and expense is earned.
Example for Income.
Here’s an example for cash basis. Let’s say you own a cleaning service and you cleaned the Johnson’s resident on November 30th, but you got paid on December 3rd. This income is recorded in December when using cash basis.
Using the same example as above, with accrual basis accounting income would be recorded in November when physical labor (cleaning) is done.
Example for Expense.
Here’s an expense example. You paid $1,200 for general liability insurance on January 1st for the full year. Cash basis accounting this, $1,200 would all be recognized in January. With accrual basis accounting, you would recognize $100 expense ($1,200 divided by 12 months) each month for the full year.
Do you have to use one or the other?
If your company is averaging more than 25 million dollars in revenue over the last three years, than you must use accrual basis. If you are under the 25 million in average revenue, then you have a choice of using cash or accrual. This is the current 2018 tax laws.
Which do I recommend?
If you meet the criteria where you can choose between the two, here are my thoughts on which one you should go with. Cash basis accounting is easier to do and will take you, or your accounting/bookkeeping firm, much less time to do. Accrual basis accounting takes more time to get all the transactions entered. The upside is that accrual is more accurate for that given month, since you are recording income and expenses that have been earned in that month. Most smaller businesses use cash basis because it is much easier to get the data entered. Bigger companies with an accounting team will use accrual basis.
If you have any more questions regarding cash and/or accrual basis accounting or any other questions, feel free to contact us.