If you’re a small business owner or thinking about setting up a business take note.
When you approach the topic of recording business transactions, you must choose between two accounting types:
· Accrual accounting
The key difference between the two accounting processes is in how you record your cash transactions.
You must record all transactions when a cash payment takes place.
Cash-basis accounting can't be used if a company sells their product or service on credit or payments the customer pays at a later date.
Depending on the size of your business, you may want to start out with cash-basis accounting. Most small businesses run by a sole proprietor or a small group of partners choose cash-basis accounting due to its simple, easy nature. Howecer as a business grows, business owners often find it necessary to switch to accrual accounting in order to more accurately track revenues and expenses.
You record all transactions when they occur, even if no cash changes hands.
When goods are brought on credit, you immediately record the transaction into an Accounts Payable account until you pay out cash.
Accrual Accounting is good for matching revenues and expenses, but is poor at tracking cash.