The difference between cash basis and accrual basis accounting comes down to timing. When do you record revenue or expenses? If you do it when you pay or receive money, it’s cash basis accounting. If you do it when you get a bill or raise an invoice, it’s accrual basis accounting.
Cash Basis Accounting
Small Business (or SMEs) that use cash basis accounting recognise income and expenses only when money changes hands. But because this doesn’t take upcoming expenses into account, it could leave you with the idea that you have a higher balance than you actually do and your financial reports could be inaccurate.
Small business that use accrual accounting recognise income as soon as they raise an invoice for a customer. And when a bill comes in, it’s recognised as an expense even if payment won’t be made for another 30 days. This means you have to watch invoices, not just your bank account, and this why you need a professional tax accountant
Some types of small businesses use a hybrid accounting system. There are lots of rules around who can and can’t do this. Speak to Chartered Certified Accountant find out what applies to you.
To learn more about cash versus accrual accounting for your small business, contact Fortuous Limited today and speak with experienced accountants in East London, who can answer any questions you might have. Be sure to click this link to Get An Instant Quote today!
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