Managing the accounts of a business can be pretty arduous. Hence, businesses choose different accounting methods to ease this process. In accounting parlance, the term cash basis accounting is fairly common. Most businesses, especially the small ones, tend to opt for this method as it is pretty simple. However, despite its simplicity, the method can also be disadvantageous to your business for varied reasons. Talking to your accountant or getting the accounting services of professionals might help in this regard. You can also use cloud accounting service or the Xero accounting software to help ease the process. We have listed a few pros and cons for the cash basis accounting method to help you get a clear picture. Here’s a look.
Uncomplicated and simple to use – Cash basis accounting is relatively uncomplicated and really simple. It is easier to comprehend than any other accounting method. It won’t be mandatory for you to get the accounting services of a professional accountant if you opt for a cash basis accounting method. Yes, it’s that simple.
Gives an accurate picture of your cash flow – The cash basis accounting method will provide you a precise picture of exactly how much cash your business has on-hand. This will give you some really essential flexibility for your business in case of any unforeseen changes which are pretty common in small businesses.
Can be done with single-entry system – The cash basis accounting system can easily be done with a simple single-entry system. However, you can also use a complicated accounting program like the Xero accounting software for your business.
Single-Entry System can be disadvantageous – Despite the simplicity of using a single-entry system that a cash basis accounting facilitates, it can also be disadvantageous as it is not based on accounting equations. The accrual method can be more helpful in that regard as it uses a double-entry system which gives sufficient control of transaction posting, and minimizes the possibility of any errors.
Restricted to some businesses only – The IRS takes the accounting method you use for your business very seriously. It says that you cannot use a cash basis accounting method if your business has gross receipts in excess of five million dollars per year, is a corporation or if it maintains inventory. There are, of course, exceptions to this rule. However, if you feel that your business comes in any of the above mentioned categories then you should get the accounting services of professionals for better guidance.
Gives an imprecise picture for long-term profitability – Cash basis accounting may give you an imprecise picture of your long-term profitability. This method does not take future expenses into account and does not show revenue that has been invoiced but not received.
The above mentioned points would have, hopefully, helped you in understanding the various facets of cash based accounting system. As you might have understood, this method has its own share of advantages and disadvantages. You hence need to be prudent while selecting the best accounting system for your business.