Why Should a Small Business Use Cash Basis Accounting

This is a guest post by Rebecca Jones

The small business owners usually employ cash basis accounting method instead of the other choice to collect, record and report the financial information. The accounting information is nothing but an array of &company&rsquo financial transactions. The financial statements are generally the final result of a company &rsquo accounting procedure. The financial statements are usually prepared using two methods- the cash basis accounting and the accrual basis accounting. Generally the bigger business groups employ the accrual basis accounting method for their accounting work. Even the smaller groups have the choice of adopting it; however, it is always advisable for them to use cash basis accounting for many of the reasons as discussed below:

The features of cash basis accounting: The method of cash basis accounting records only the financial transactions when you see cash changes hands. This method renders the small business owners with a simple and easy method of managing financial information. With this system the small entrepreneurs are able to maintain perfect record of the company’s cash flow. However, when you look at the accrual accounting method you have to record financial transactions as they arise or occur, irrespective of the cash changes hands. This method gives a clear image of financial transactions regarding all the business operations. So considering the simple and easy features of cash basis accounting, small business owners should choose this method over the accrual accounting method.

No need of cash flow consideration:

The businessmen while adopting the accrual accounting method have to develop a cash flow statement. So when it comes to monitoring the track cash perfectly, the accrual accounting method is considered to be notorious since it is unable to track the cash in the company’s general ledger. To fix such type of situation, you need to develop the cash flow statement to track all the cash inflows and outflows from your business operations. With the help of cash flow statements the business owners (including the smaller groups) can make out the difference between the net income and the cash flow in the business operations. The bigger businesses can employ a blend of both accounting methods, however, the small business owners do not require to follow such complex systems for their financial information. Or in other words they must simply follow cash basis accounting method which is free from such complications.

Cash Basis Accounting method are simple to manage:

The benefit of using cash basis accounting method is that even the small business owners without having a proper accounting background can manage it very easily. This method just need a fewer journal entries for creating financial statements and closing an accounting period. On the contrary, the accrual accounting method renders the businesses with detailed financial information in a number of specific accounting periods. This method can help companies with things like creating trend analyses to calculate the future sales revenues and the number of other business expenses pertaining to their operations. Any small business would not require such complex procedures and reports at their early stage, hence adopting cash basis accounting would be a better deal for them. Both the cash basis and accrual accounting methods are considered to be approved accounting methods for the tax purposes. However, the GAAP (Generally Accepted Accounting Principles) needs specific companies to employ the accrual accounting method for their financial information maintenance. To be eligible for this method you need to be a company with five million dollars in your annual sales or have one million dollars in your annual inventory-based sales. Smaller companies do not usually fall in these requirements hence use cash basis accounting owing to the above reasons as discussed in the article.

About the author: Rebecca is a blogger by profession. She loves writing on Wireless Router technology. Beside this she is fond of Leather Bracelets. These days she is busy in writing an article on Wireless Bridge