In the April 19th post I discussed the difference between cash and accrual accounting. In this post I'll go over why you might want to choose one over the other. My objective for this blog is to always portray the topics from the business owner's perspective. In this case I'll start with a strong belief that your financials are the tool by which you measure your success if implementing your business plan and of course the success of your business.
Your financials should try, as closely as possible, to report the sales in a given month with all the expenses that were incurred in that SAME month to generate that revenue. For businesses that don't give terms to their customers that create receivables or receive terms from their vendors that create payables, the cash basis is probably appropriate. A lot of small B to C (business to consumer) businesses fall in that category. As B to C businesses grow and for almost all B to B (business to business) businesses, the accrual basis is necessary.
If you review the April 19th post you'll see that timing is everything and that only the accrual basis of accounting will meet our objective to have the revenue and expenses for each sale aligned in the same month.
Choosing accrual accounting is not the only decision we need to make to make sure we have our revenue and the corresponding expenses aligned in the same month. In the next post we'll look at some GAAP (Generally Accepted Accounting Principles) that may be appropriate for small business to increase the accuracy of their financials.
