accountingcashChapman Upchurch

Cash vs Accrual Accounting – Pros and Cons

pros consThe advantage of cash accounting is that it’s easier to understand. You see exactly what your cashflow is and you can see your cash reserves clearly.

The disadvantage is that you don’t have an easy way of tracking how much money you owe your creditors or how much money your debtors owe you.

It doesn’t take future expenses into account. So it can sometimes be hard to assess long-term profitability in your business and it can be hard to spot the risks where money you owe will undercut your incoming revenues.

As mentioned in our previous blog Cash or Accrual Accounting, your income tax payable will also need to be calculated using the accrual method of accounting, so adjustments will be required to determine your tax liability.

The advantage of accrual accounting is that it’s easier to see amounts owed by debtors (so you can do something about them). It’s a more accurate picture of activity in your business for any given period.

You can see the sales you’ve made and your costs, regardless of when the money is actually received or paid out.

The downside is that it is more complex to administer. It’s where the so-called double-entry bookkeeping system comes into the picture (let’s leave that for another day).

It may be necessary to make accounting adjustments at the end of the reporting period to account for sales which have been made but the money has yet to be received for them.

Similar adjustments will be made for expenses incurred but not yet paid for. Generally, making these adjustments for you is where we come in.

If you want to know more about what method is used for your business and how it works, contact us.