One of the first decisions you need to make when you start a business is whether to use the cash method or accrual method of accounting. Cash-basis accounting simplifies your bookkeeping process, but not all businesses qualify to use this method. Understanding the benefits and the qualifications helps you decide if the cash method is right for you.
Basics of the Cash Method of Accounting
When you use cash-basis accounting, you record transactions when the money moves. For accounts receivable, that means you record a payment from a customer when you receive it, even if the sale occurs on a different day. For your expenses, you record the transaction when you make the payment, even if you receive the bill the month before.
Because journal entries are only posted when cash is spent or received, there are fewer rules to follow compared to other accounting methods. It’s easier to report taxes, because all of the cash collected for the year represents your annual income. You typically make fewer entries when using the cash method of accounting, so it works well for businesses looking for an easy way to perform bookkeeping. Another major advantage of this method is that you’re always aware of your cash balance. Accrual accounting methods require cash reconciliations, but under the cash method, you always know where you stand in terms of liquidity.
Requirements to Use Cash Accounting
A small business can opt for cash basis accounting as long as it meets a few requirements. Some key factors to consider include:
- Larger companies with public stock are required to use accrual accounting.
- If you require an inventory balance to account for your income, it’s impossible to use the cash basis.
- A business must generally earn less than $1 million to be eligible for the cash method.
- The business must not constitute a tax shelter to use cash-basis accounting.
If your business meets the criteria, it can use the cash method for an easier approach to finances. No matter which method you choose, using QuickBooks Online simplifies your bookkeeping and financial record keeping even more. Keep your books accurate and up to date automatically. Change the way you manage your finances now.