Accounting is vital for every business. As Allison Dunn stated, “Businesses that succeed treat accounting as a tool, not an afterthought.” Most small business owners aren’t trained accountants, so the many essential tasks of accounting can be complex, daunting, and time-conuming. A key element of accounting is to choose the right accounting method, primarily between cash accounting and accrual accounting.
Why Small Business Accounting Matters
Accounting helps every business plan for growth. Accurate financial reporting provides a full picture to assess how well your business is performing and to make informed decisions. It is required to secure a loan. You need accounting to attract investors or sell your business. Accounting helps you and your employees get paid properly. It helps you stay on top of your expenses and debts. It helps protect you from the problems of expensive penalties. And it helps you pay the right amount of taxes.
Accounting Method
An accounting method refers to the rules that a company follows in reporting revenues and expenses. Choosing the right accounting method will define how you prepare your books and the kind of financial information you will have available to analyze. There are three methods: cash accounting, accrual accounting, and modified cash accounting.
With cash accounting, a company can only use cash accounts. This means that you can record things like cash, expenses, and income, but you cannot track long-term liabilities, loans, or inventory. You report income in the year it was received and expenses when they are paid.
Accrual accounting is much more complex than cash accounting. Accrual accounting allows a business to record more accounts including accounts payable, current assets, long-term liabilities, and inventory. Income and expenses are recorded when they occur. Public companies are required to use accrual accounting.
Modified cash accounting is a hybrid method, where accounts from both cash and accrual accounts are used.
Cash Accounting
Cash accounting can suit smaller-scale businesses. Cash accounting is easier to implement and understand compared to accrual accounting, especially for small businsses with straightforward finances. It offers a clear view of cash availability at all times, since it tracks money as it is received or spent. It assists in managing tax liabilities, since taxes are not paid on income until it is received. It requires less time and fewer resources versus other accounting methods.
The first negative of cash accounting is that it doesn’t show a company’s full financial picture. It is not available to every operation. Corporations cannot use cash accounting if their average annual receipts exceed $27 million. If a company sells on credit, that is, providing goods or services without immediate cash receipts, you are better off using the accrual method.
Small Business Accounting Practices
Follow these five essentials:
- Master the four primary financial statements.
- Carefully manage cash flow.
- Record and track all expenses.
- Create and follow budgets.
- Stay on top of tax deadlines.
- Bring in the experts instead of doing it yourself.
Seek Professional Accounting Assistance
Contact Irongate Business Partners based in Charleston and serving small businesses in the Lowcountry of South Carolina. We provide bookkeeping, financial analysis, and outsourced accounting services. Some of our major client categories include construction companies, restaurants, HVAC and home services companies, and medical practitioners. Our aim is to empower growing small businesses with accounting and financial insights and services that otherwise might be out of reach.