Vince Iannello Describes Cash Basis Vs Accrual Based Accounting
Vince Iannello compares cash-based and accrual-based accounting and explain why you should choose one over the other. Cash-basis accounting is simpler to use, but it can be overstated by companies that are cash-rich. The good news is that both are equally useful for tracking your business’s performance. Keep reading for more information. Listed below are some of the key differences between the two systems.
Examples
If you want to understand why cash basis accounting is simpler, look at two common examples. Using the cash basis, revenues are recorded only after customers pay and expenses are recorded only when employees or vendors pay you. With accrual accounting, you’ll have to account for both types of income in the same way, and it can make your business’s financial statements and tax returns a bit complicated. Fortunately, cash basis accounting is simple to implement and maintain.
Vince Iannello reminds that when deciding which method to use, take into account what your business requires. For instance, if your revenue is mostly based on cash, you’ll want to use cash basis accounting, as this method requires less work and has a lower learning curve. On the other hand, if you’re a large company, accrual-based accounting may be the best option. This is especially true for smaller businesses, where determining the right method depends on whether you’ll need to file for external reporting or do a M&A.
Cash basis, emphasizes Vince Iannello
This method of accounting records transactions for income and expenses as they receive. In contrast, a company’s outgoing funds are on track when they are paid. This method does not account for unsettled bills or invoices until payment in full. Cash basis accounting also allows for a more realistic picture of a company’s income and expenses. This method has some disadvantages, though.
A cash basis accounting system makes it easier to track and maintain logs of transactions. A bookkeeper does not have to keep track of the date on a calendar. It’s also easier to see the cash balance. Cash basis accounting also allows for a more accurate view of income and expenses because it shows the cash flow of a company’s operations. It is best for small businesses and personal finance, as it can help a business make better financial decisions.
Liabilities and assets
In addition to its tax planning capabilities, the cash basis method presents a company’s assets, liabilities, and revenues in an inaccurate manner. For example, companies using the cash basis system do not pay taxes on their income until it actually comes in. Moreover, a cash-rich company will appear to be in the black when it actually is in the red. So, the cash basis system is not recommended for companies with high levels of cash on hand.
But the cash basis method is not without its drawbacks. Vince Iannello notes that it can distort financial statements by overstating a company’s cash position and making it difficult to plan a company’s future. For instance, a business with a large debt and an expected surge of cash receipts may look to be cash-rich at the moment, but in reality, it is actually in the red because of expenses. And since this method doesn’t account for future expenses, it can lead to a false profit number. Therefore, cash basis is not an acceptable method of accounting for publicly traded companies.
Strategic workflows
While both have their advantages, cash basis accounting is simpler to implement. Small businesses often use it because it allows them to focus on strategic planning, rather than tracking expenses. If a business bills a client $1,000 on March 1, it will record that income in its March bookkeeping. When the client pays the business on April 15, it will record that income in its April bookkeeping. As with any accounting method, both cash and accrual have their benefits.
The advantages of cash basis accounting are many. First, it is easy to understand, since you can understand how the money exhausts. Then, you can analyze it. With accrual accounting, you can see how much money has been spent, and how much has been earned. This type of accounting is generally more accurate than cash basis accounting, and it conforms to nationally accepted accounting standards. Second, it helps a business better understand its performance.