Advantages and Disadvantages of Accrual vs Cash Based Methods

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In bookkeeping, there are two commonly used methods: accrual and cash based. The method you choose depends on your business and level of income. Many small businesses have a choice of either the accrual or cash based method. If income is above $5 million, the accrual method must be used. Also, if a business’s inventory of items for sale to the public and gross receipts are over $1 million, the accrual method must be used. Inventory includes merchandise sold and supplies intended for sale.

With accrual and cash based bookkeeping, neither method provides a complete picture of the financial status of a business. While the accrual method provides an accurate depiction of the daily transactions of a business, it may be inaccurate in terms of cash reserves, hindering cash flow. For example, if there is a delay between making a sale and earning revenue from that sale, the income ledger will be inaccurate for that accounting period.

Utilizing the cash based method will provide a more accurate depiction of a company’s cash amount, but may be less accurate when depicting long-term profitability. For example, the cash method may reveal uneven months of profit as delayed revenue is collected.

Choosing either method will affect tax deductions at the end of the year. If expenses from one tax year are not paid until the next, those expenses cannot be claimed as deductions using the cash method. However, because transactions are recorded when they occur as opposed to when payment is received, deductions can be claimed using the accrual method.

With accrual and cash based bookkeeping, neither method provides a complete picture of the financial status of a business. While the accrual method provides an accurate depiction of the daily transactions of a business, it may be inaccurate in terms of cash reserves, hindering cash flow. For example, if there is a delay between making a sale and earning revenue from that sale, the income ledger will be inaccurate for that accounting period.

Utilizing the cash based method will provide a more accurate depiction of a company’s cash amount, but may be less accurate when depicting long-term profitability. For example, the cash method may reveal uneven months of profit as delayed revenue is collected.

Choosing either method will affect tax deductions at the end of the year. If expenses from one tax year are not paid until the next, those expenses cannot be claimed as deductions using the cash method. However, because transactions are recorded when they occur as opposed to when payment is received, deductions can be claimed using the accrual method.

 

Are there different kinds of accounting?

There are many different types of accounting. The most common types of accounting are tax accounting, managerial accounting, and financial accounting.

Can a bookkeeper call themselves an accountant?

No, a bookkeeper cannot call themselves an accountant. To become an accountant, there are educational requirements. A bookkeeper does not require any degree or certification. Although, it would be wise to hire a bookkeeper who has taken the initiative to become certified.

Can I do Bookkeeping for my Small Business?

Although small business or start-ups can likely do their bookkeeping using online software for a short while, transactions will eventually increase, and it will be difficult to manage both the business and the finances. Therefore, it is the right decision to hire a bookkeeper from the initial stage.

Can I do my own bookkeeping?

Yes, especially if your business is small and has few transactions. The dilemma is do you have the extra time to complete your books accurately and regularly. You must weigh the value of your time as a business owner with the cost of outsourcing your bookkeeping.

Charges of Bookkeeper per hour Online

The amount a bookkeeper should charge per hour depends greatly on their experience and knowledge. If you are new to the profession, you will need to establish yourself before you can charge more for your time, so you might start out charging clients closer to $15 per hour. If you are more experienced and have some certifications, you might charge closer to $25 per hour.

Not only do your experience and knowledge factor in, but so can your location if you are a traditional bookkeeper who deals with local clients. A well-known established bookkeeper in a high cost of living area could charge $50 per hour or more. If you are a bookkeeper who provides services virtually, you most likely will not have to factor in your location as much when deciding what to charge.

If you want to be able to charge your clients more for your services, getting certified is a great idea. Being certified illustrates your dedication and your knowledge in the profession. You can become a certified bookkeeper through the National Association of Certified Public Bookkeepers (NACPB) or the American Institute of Professional Bookkeepers (AIPB), and also earn certifications for specific software like QuickBooks or Xero.

Do Small Businesses need Bookkeeping?

Bookkeeping is an essential part of running any business, even small businesses. It is important to be aware of how much money is spent and how much is coming in. On top of that, you need all the data used in bookkeeping to file your taxes accurately.

How can you Review Outsourced Bookkeeping?

You can ask your bookkeeper to provide the financial statements for the required period. You can reconcile the statements to understand the efficiency of your bookkeeper and communicate anything required.

How do you do Virtual Bookkeeping?

The initial step is to connect the client remotely to balance the books. Then you will work through online cloud-based bookkeeping software like Xero and QuickBooks with a secured login. You can use the same desktop software you are used to, but you will access it through a hosted virtual desktop.

How do you Quote Bookkeeping Services?

The strategy for bookkeeping service pricing is cost-plus pricing. Here, you must take what it costs to provide the services and add a percentage to that amount to estimate how much you have to charge to make a profit.

How Does a Virtual Bookkeeper Work?

Virtual bookkeeping will handle all your bookkeeping remotely. They categorize your transactions and prepare financial statements for your business. All the document storage is handled within bookkeeping software.

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