The world of accounting will never be the same without the two primary accounting options – cash accounting and accrual accounting. While both methods have their own characteristics and benefits, they are notably different from one another. In fact, choosing one over the other will impact how a startup’s financial health is perceived. Not sure how? Well, we will make it simpler for you.

Introduction to cash and accrual accounting

The term ‘cash accounting’ is self-explanatory. It is a method where revenue and expenses are registered only when money changes hands. So, income is recorded as and when you pay money to a shopkeeper, and expenses when the cash is paid out. That should be easy to understand! Naturally, the method makes it easy to track cash flow and gauge the immediate financial standing of the business.

As for accrual accounting, this registers income and expenses when it is incurred or earned, regardless of when money changes hands. So, this offers a more accurate and long-term picture of the company’s financial health. Why? Well, because it includes payables and receivables as well.

Cash and accrual accounting for startups

If truth be told, there’s no right or wrong to this! Choosing between cash accounting and accrual accounting entirely depends on a startup’s requirements.

If you prefer operating on a pay-as-you-go model, going for the cash accounting method will serve you well. This is so because it gives you a clear view of cash in hand. This is particularly suited for young startups with limited transactions. However, its only drawback is that it does not take into account outgoing payments or future expected income.

On the other hand, accrual accounting is better suited for businesses with larger volumes of transactions or which have credit transactions. In such a case, accrual accounting presents a more long-term perspective by incorporating payables and receivables. It also allows for better strategic planning. Its only folly is that it presents a rosy picture of an income waiting to come in, which can be a little misleading when the cash flow is particularly low.

Key takeaway

As mentioned earlier there’s no right or wrong to cash accounting and accrual accounting, though choosing the one that would best work for you, is vital for young startups. So, all you can do is go through our blog and make an informed decision. You can even reach out to our CPA firm in California – Basta & Company, for all your accounting needs and rest easy knowing that your business accounting is in safe hands. Our team of experts is dedicated to helping small businesses and young startups heighten profitability while meeting tax guidelines. Give us a call now!