Category: Accounting

The Difference Between Accrual Basis And Cash Basis In Accounting

In financial accounting, you must know the mechanisms for recording and reporting transactions. For that, accrual basis and cash basis accounting are the two main methods used worldwide. While both are used to record financial activity, they differ significantly. Here’s an in-depth comparison of these two accounting methods.

The Fundamentals of Cash Basis Accounting

Cash basis accounting follows a straightforward approach. Income is recorded when received, and expenses are recorded when paid. This method offers simplicity and clarity, especially for small businesses or startups.

Key Features of Cash Basis Accounting

Given its direct approach to recording cash transactions, it is quite simple to understand and apply. Second, since the revenue and expenses reflect the cash inflows and outflows, this clearly shows a company’s cash situation at any given time.

Lastly, despite its simplicity, cash-based accounting may not provide an entirely accurate picture of a company’s financial health. That’s because it fails to account for credit transactions or financial commitments not yet paid or received.

The Intricacies of Accrual Basis Accounting

On the other hand, accrual basis accounting is more holistic for recognizing revenues when earned and expenses when incurred. This is true regardless of when cash is exchanged. This method offers a better understanding of a company’s financial status.

Key Features of Accrual Basis Accounting

First, recognizing revenue and expenses in real-time gives a more accurate portrayal of a company’s financial standing. For that matter, it also considers future inflows and outflows of cash, which help in better management of financial performance. 

A more accurate financial picture comes at a cost of complexity; companies need meticulous records to track revenue and expenses accurately as they are earned or incurred, not just when the cash changes hands.

Cash Basis Vs. Accrual Basis: Which to Choose?

Choosing between the two depends on some factors:

  • Size of the Business – For small businesses with mostly cash transactions, cash-based accounting can be more practical and less complex. On the other hand, companies with bigger credit transactions or inventory might find the accrual one more ideal for accurate financial reporting.
  • Legal Requirements – In some areas, companies that have a certain size or type are required to use the accrual one to ensure more accurate financial reporting.
  • Need for Financial Management and Analysis – Lastly, if financial management or analysis is highly required, then the accrual method may be more helpful. The cash basis may not show the full financial picture. This is true especially if large credit sales or purchases are always involved.

The Many Responsibilities Of A Company’s Accountant

Accountants take on the responsibility of proper safekeeping and financial documents management. Metaphorically speaking, they act as the backbone of any business organization. Accountants ensure that the company’s finances are in perfect order, through taking on budgeting and expenditure.  

Be it a start-up or a huge company, a company accountant’s role does not vary. It is the duty of the accountant to ensure intelligent money management and effective strategic planning and decision-making. 

Below is a comprehensive list of the responsibilities of a company accountant. 

  • They get financial statements done. 

A comprehensive and well-prepared financial statement enables a company to make informed business decisions. First, accountants collate relevant financial data from various trusted sources including balance sheets, cash flow, and income statements. Then, they analyze available data to check for patterns, trends, and potential anomalies. Finally, they give out data-driven insights and recommendations to the management.

  • They forecast spending and allocate budget. 

Financially successful companies have the ability to forecast possibilities and allot resources. Accountants align the crafted budget to the goals of the organization. They match the investment and expenses to its income. They also identify potential opportunities and threats, and make proactive initiatives to reach the business targets. Besides that, accountants sustain the needs of the organization including its workforce through wise use of resources. 

  • They maximize tax efficiency and compliance. 

One of the crucial roles of accountants is ensuring that the company is tax-compliant. Through careful tax planning and preparation, they see to it that no tax obligation is left unsettled. They even recommend better ways to trim down tax liabilities without compromising compliance. Proper records management is every successful accountant’s secret. This does not only ensure transparency, but also lessen penalty and audit risks.   

  • They sustain the effectiveness of the company’s internal control system. 

In the corporate world, trust and integrity are a huge deal. It is for this reason that accountants are serious about risk management and internal control. They identify possible vulnerabilities, design risk mitigation strategies, and closely monitor the effectiveness of these strategies when used in the context of the organization. 

In the integration of the risk management scheme into the company operations and framework, company accountants work hand-in-hand with other departments.  

  • They support the management in making decisions. 

Last on the list, company accountants are management partners in decision-making. They help achieve financial growth and stability. Their knowledge and expertise in scrutinizing financial data and forecasting outcomes are valuable tools in ensuring that an organization always make a sound decision. 

Business Accounting: Pros and Cons of Keeping It In-House

Businesses need accounting. However, more and more businesses have come to depend on outsourcing their accountancy needs instead of keeping everything in-house with a salaried accountant.

Should you keep your business accounting in-house or outsourced? Insourced or out-house? The answer isn’t as simple as you’d think. Long story short, outsourcing is good for short-term growth but a bookkeeper is for life.

Outsourcing vs. In-House Accounting

The pros and cons of outsourcing and in-house accounting are as follows.

  • Keep It In-House for Established Businesses: Fledging businesses that have to penny-pinch to survive until they grow big enough to become self-sufficient would rather hire accountants on a per-case basis. Established businesses that can afford in-house accounting should go for in-house accounting.
  • A Dedicated Bookkeeper Offers Dedicated Service: Once your revenue goes past a certain point, it’s better to get a full-time bookkeeper over paying for outsourced accounting. It’s like having a family doctor who knows your history over going from doctor to doctor with only a vague idea of your medical history.
  • Get Someone Who Knows Your Track Record: A full-time bookkeeper gets to take into account your company history. Even though he’s a numbers guy, the mathematics of your business will also give him an idea of which products or services make money or not. Ditto on profitable and non-profitable marketing.
  • They’re Literally Worth Every Penny: An in-house accountant is worth their weight in gold because they help calculate financial health or give you pertinent data to ensure you’re always making your best financial or business decisions. They also keep track of profitable ideas and figure out worthwhile calculated risks.
  • A Long-Term Investment: Outsourced bookkeepers don’t see the big financial picture and can only tell you if a present project, product development overall marketing scheme, corporate identity redesign, or social media marketing investment is worthwhile or not. A full-time bookkeeper knows your history, what works, and what doesn’t.
  • The Main Reason for Hiring: The main reason you should hire someone instead of outsourcing is the same reason it’s better to not outsource the CEO. When you want your employees to be all hands on deck, you want an in-house accountant to be one of them to do specific, specialized, or even unusual accounting.

Which Should You Go For?

Outsourcing is convenient, you have a whole company of accountants doing your accounting in a per-project basis, you can easily shift from one service or another without firing one and hiring another then retraining a new accountant every time, and so forth.

Again, in-house accounting makes more sense for established businesses. A full-time bookkeeper or two ensures continuity in keeping track of the business’s financial health and making informed business decisions. They can oversee the whole economic ecosystem of your company as your accounting specialist.