As a small business owner, you probably got into your business because you love fixing things or providing top-notch customer service. The last thing you want to think about is accounting, let alone the differences between cash basis accounting and accrual accounting. Aside from accounting, you must also protect your business digitally through online tools like that on www.zerobounce.net/free-email-verifier/.
But you really need to get the difference for the success of your business if you plan on growing past a few trucks.
What is Cash Basis Accounting?
Cash basis accounting is a simple way to keep track of your business’s finances. It records transactions when cash enters or leaves your business. This means you record revenue only when you receive payment and expenses only when you make a payment. It’s straightforward and easy to understand but doesn’t give a complete picture of your business’s financial health (like if there are large customer deposits or down payments on what you’re buying).
What is Accrual Accounting?
Accrual accounting records transactions when they occur, regardless of when you receive or pay for them. This means that revenue is recorded when you earn it, not when you receive payment, and expenses are recorded when you incur them, not when you make a payment. This method provides a more accurate picture of your business’s financial performance and allows you to plan for the future.
An Example of Accrual Accounting
Let’s say you’re an HVAC business that installs a new dual fuel heating system for a customer in January, and they pay you in February. Under cash basis accounting, you would record the revenue in February. However, under accrual accounting, you would record the revenue in January, when the work was completed. This gives you a more accurate representation of both January and February results. You did the work in January. You incurred costs in January. So, you should record the revenue in January. Way better to make informed decisions based on that data.
It’s tricky to get started with and can be confusing until you get the hang of it. But it’s worth it. Almost all successful growing businesses use accrual accounting and the sooner you make the switch, the better!
Implementing Accrual Accounting
If you’re not already using accrual accounting, we recommend working with a professional accountant to help you make the transition (hint, hint). They can ensure that your financial records are accurate and help you understand the implications of your financial statements.
So, What Now?
If you own an HVAC/Electrical/Plumbing or other trade business and are in the $1-15 million in sales range, now is the time. If you’re not sure where to start, give us a call. We’re happy to help!