Is QuickBooks or Xero Better Accounting Software?

A laptop on a countertop, symbolic of choosing the best accounting software for your business.

Which is Better – QuickBooks or Xero?

Is Quickbooks or Xero better accounting software is an age old question in the world of bookkeeping. And that’s not a surprise. When it comes to accounting software, QuickBooks and Xero are the most popular names in the market today. Both provide powerful, comprehensive accounting solutions. They tick most boxes that business owners are looking for. However, their approaches are different. That is why one is more preferred in the business community than the other.

Xero is an incredibly user-friendly accounting software. It is designed to help businessowners in a simple way. On the other hand, QuickBooks has a cloud-based system. It allows you to manage your bills and invoices, track your projects and accounting processes through your smartphone. Things could not get any easier or more convenient than that.

Add this to other advantages, like flexibility and detailed reporting, and you will see that QuickBooks has a clear edge over Xero. Here is why.

Popularity

Launched in 1983, QuickBooks has a long history in the world of accounting software. Xero was founded in 2006 and is no newbie either. However, QuickBooks is the most popular by far and is preferred by many accountants and businessowners.

With about 8 million users worldwide, QuickBooks is an accounting software giant. (Xero comes next with more than 3 million users around the world.) This is not only because QuickBooks has been in the market for longer. QuickBooks is also very well-developed and offers a higher value for your money. That is why it has been dominating the US market for years.

Scalability

When choosing an accounting software, you want something that will be able to grow with each stage of your business. While both software offer multiple tiers, QuickBooks has greater flexibility, higher reporting standards at each level, and a much higher ceiling. In the higher-tier plans, for example, QuickBooks provides customized reporting options. This could be of a great value to experienced businessowners who wish to run more complicated reports as their operations expand.

Ease of Use

Both accounting software companies offer a user-friendly dashboard. You can easily get an overview of all your main business accounting data. Choosing one user interface over the other comes down to your personal preferences. However, QuickBooks has an edge with its customizable layout. You can easily get a quick glimpse of your business profit/loss, expenses, invoices, sales and much more. Furthermore, QuickBooks offers a superior reconciliation process and greater flexibility when creating journal entries – both of which are central to the bookkeeping process.

Reporting Flexibility

Over time, you will get more experienced at accounting and business operations. As a businessowner, you will need more complex, detailed reports from your accounting software. That is why, the reporting capabilities of QuickBooks scale up with each plan tier. They are designed to reflect your growing business requirements. With each upgrade, QuickBooks provides more detailed, complex reporting. This is crucial for setting your business goals and predicting new business trends.

Xero is not as flexible. It provides users with project tracking and expenses claiming options only at the highest-tier plan. Other than that, Xero’s reporting capabilities stay relatively the same.

Transaction Tagging

This feature is available in both QuickBooks and Xero. Each accounting software offers their own versions of transaction tracking tags. However, as usual QuickBooks has an edge in this area. Xero lets users create only 2 active tracking categories. Meanwhile, QuickBooks allows you to create 40 tracking categories in their Simple Start, Essentials and Plus plans.

The more tracking categories you create, the more reports you will get. This will provide you with a better overview of your business operations. It will also help you spot business growth opportunity.

A pair of hands holding up a clock on a blue background, symbolic of a discussion of the QuickBooks and Xero time tracking features.
Which software has better time tracking – QuickBooks or Xero? Read on!

Time Tracking

With Xero, you can unlock this feature only at their highest plan tier. By choosing QuickBooks, you can enjoy time tracking feature at each plan level they offer. Mileage tracking is also incorporated into all QuickBooks plans.

Invoices

QuickBooks supports an unlimited number of invoices in all its plans. Xero’s Early plan allows only 20 invoices per year. If you need more invoices, you will have to upgrade your subscription or switch to QuickBooks.


At My OC Bookkeeper, we are Southern California’s premier bookkeeping, accounting, outsourced CFO and business consulting firm. We can help you with anything that has to do with business finance – from day-to-day bookkeeping to building complex financial models, we know how it is done. (We also know whether QuickBooks or Xero is better, see above.) It doesn’t matter if your business is just getting started or already well-established, our services will help you thrive. So, if you are looking for a true partner you have come to the right place. Reach out to us today and let’s do great things together!

Wondering about accounting software because you are starting a new business? Check out this great blog post for everything you need to know about starting a business in California. (Orange County specifically but it’s applicable all over.) Or, if you are a visual learner, check out the video below. Good luck!

Introduction to Accounts Receivable

A man holding cash in his hand, symbolic of the relationship between accounts receivable and getting paid.

Accounts Receivable Basics

When your business starts out, you’re probably focused on expenses. Every penny going out the door (or your bank account) is money that you’ve invested or borrowed to start up your company. Once you’ve landed your first client, it’s essential to give your revenue just as much time and attention as you gave to those first expenses. (This is why our introduction to accounts receivable is key!)

For some businesses, you receive payment at the time of sale. A restaurant is paid at the end of a meal. A fast-food restaurant receives payments prior to the meal delivery.

But for many other types of businesses, you bill your clients after the services or goods have been delivered. This is especially true of projects that are billed hourly, where you may be able to estimate the amount of time a project will take but you cannot be sure of the final total until the project is complete.

Some businesses take several payments on invoices such as construction companies or manufacturers. They may take an initial deposit and several payments throughout the projects on a single invoice.

Keeping track of the amount you’ve billed your clients or customers is key to maintaining cash flow and ensuring that you get paid for the goods or services you are providing.

What is Accounts Receivable?

Accounts Receivable is calculated as:

Accounts Receivable = Amounts Billed to Customers – Amounts Received

In other words, Accounts Receivable are the payment requests that you have sent out less the payments you received. Like a pirate that buried treasure with the intent of going back and collecting it later, every invoice is like a little bit of treasure that you intend to go back and retrieve.

Accounts Receivable is considered a current asset which means that you expect to receive payment on the invoices in less than a year.

Who needs Accounts Receivable?

Any business that does not receive payment before providing their service or immediately after needs to track their customer’s amount due. Even for businesses that use the cash basis of accounting for tax purposes, it’s essential to have an understanding of how much you expect to collect in the future to be able to project your cash flow. Additionally, businesses that need financing will often have to provide an accounting of account receivable to the financial institution to obtain a loan or line of credit. In some cases, it is possible to sell your Accounts Receivable balance to finance companies to fulfill an immediate need for cash. This is called factoring and usually carries a high imputed interest rate.

What other concepts are related to Accounts Receivable?

There are a few other concepts to understand when it comes to Accounts Receivable.

  • Invoice: A payment request sent by a provider for goods or services.
  • Net 30: When this appears on an invoice it means that payment is due 30 days after the invoice date. There are other common collection periods such as 45, 60, or 90.
  • Discount: Some invoices will include a discount if paid in full within a certain number of days otherwise the full invoiced amount is due.
  • Progress payments: These are payments made against an outstanding invoice that are not intended to cover the full amount of the invoice.
An hourglass symbolic of how you will have to wait to get paid if your business's AR function is poor.
A poor AR function will leave you waiting to get paid!

What is the best way to monitor outstanding invoices?

When your business is small, you might be able to manage a handful of client invoices on your own without much thought. You’ll know who has paid you. A small business may be able to track invoices in Excel or a Google Sheet. But as your business grows, you may find yourself needing a more robust system for tracking invoices.

All significant accounting systems allow you to track customer invoices though some accounting systems, like QuickBooks Online, will require an upgraded subscription to activate this feature. No matter which system you use, you’ll want to track the date that the services or goods were provided, the customer name, the amount due, and any additional fees such as interest, late fees, or sales tax.

Once you’ve entered your invoices including the date that the invoice was sent to the client, you can run an Accounts Receivable aging report. The aging report shows you, by client, how long their invoices have been outstanding, usually grouped into 30-day increments. This helps you determine who needs to be contacted about outstanding bills.

How does thorough tracking of Accounts Receivable help your business?

If you have clients that are consistently behind on your invoices or do not pay them at all, you may want to reconsider them as a client or at least have a discussion with them about paying you in a timely manner.

Minimizing the time that invoices are outstanding creates a healthier cash flow for your business. If your clients are regularly behind on your invoices, you may want to consider accepting other types of payments including credit card payments to reduce the time it takes you to receive funds, even if you end up paying higher fees.

Billing is often the least fun aspect of owning a business and can often be overlooked or put off. By tracking your accounts payable, you can ensure that your clients are being billed regularly. No one likes a surprise bill years later, and those surprise late bills are much less likely to be paid.

Should you manage your AR yourself?

Early in your business’ life, you can probably monitor your Accounts Receivable yourself. As the number of clients grows, the amount of time it takes to input, review, and take action on your Accounts Receivable will also grow.

Many business owners find it uncomfortable to follow up with clients and ask for payments. While no one should feel awkward talking to a client about charges, it’s still fairly common. Outsourcing your accounts payable tracking and collection allows you to continue to focus on running your business while letting someone else deal with the headache of monitoring and collecting your payments. (Want to learn even more? Take a look at Deloitte’s write up on optimizing your AR function.)


Looking for a bookkeeping specialist to help with your accounts receivable or anything else related to your business? At My OC Bookkeeper we help companies all over Los Angeles, Orange County, Riverside, and San Diego with all things business. Whether you need help with bookkeeping, accounting, financial modeling, business plan development, CFO services, or anything in between, we are here to help. Reach out to us here.

Have thoughts on our introduction to accounts receivable? Leave us a comment and let us know!

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Introduction to Accounts Payable

A man pulls money out of his wallet, symbolic of our introduction to accounts payable.

Accounts Payable Basics

When starting a business, you’re probably focused on revenue. Landing those new clients. Building your portfolio of work. Seeing those deposits hit your bank. Revenue is exciting.

But just as important is tracking your expenses, and that means having a solid understanding of Accounts Payable. Nobody loves bills (whether we’re talking about paying bills or tracking them) but let’s talk about why it’s important. So, buckle in and read on for our introduction to accounts payable.

What is Accounts Payable?

The short answer is that Accounts Payable, sometimes referred to as AP, consists of your bills and the payments you’ve made against those bills. Your Accounts Payable balance is:

Accounts Payable = Bills Received – Payments on Bills Received

Your AP balance at any moment of time indicates your obligations to pay your vendors and suppliers. Accounts Payable shows up your balance sheet as a short-term liability meaning that it’s an obligation that will be paid (or should be paid) within a year.

Accounts Payable does not include all of your obligations – it does not include long-term liabilities such as loans, leases, or pension payables. It also does not include tax payment obligations which are tracked separately.

Why is Accounts Payable important?

You’ve probably had the moment of panic when you spot an unpaid bill buried on your desk and wondered if you’re going to get hit by a late fee, or maybe you’ve been embarrassed by a phone call from one of your vendors politely inquiring where their payment is.

Knowing who you owe money to, how much you owe, and when the payment is due is key to streamlining the financial side of your business. By tracking your bills carefully, you’ll be better able to predict your cash flow (or at least the outflows) in the future.

Ensuring that all your bills are paid on time can protect your business credit, or if you’ve personally guaranteed any of the bills, your personal credit. Businesses that habitually pay their invoices late ruin their reputations and have trouble finding good vendors to work with. Just like you want your clients to pay you on time, so do your vendors.

I use cash accounting – why should I care?

It might be tempting to not enter your bills into your accounting system if you use the cash basis of accounting. Most modern accounting systems allow you to switch your reports easily between cash and accrual basis, so don’t use messing up your reporting as an excuse to avoid entering your bills.

As a business owner, you have enough on your mind with the actual operations of your business. Trying to remember how much you owe on a specific bill and when the bill is due just adds one more item to your mental juggling. By entering the bills as they are received, you’ll be able to easily pull up reports and receive automated reminders when bills need to be paid.

Additionally, although the cash basis of accounting may be sufficient for tax purposes, entering your bills will allow you to better match up your revenue and expenses based on when they were incurred. It’s a little extra work to enter the bills, but the extra insight that you gain from entering the bills is usually worth it.

A clock, symbolic of how a good accounts payable system can keep you from paying your bills late.
A good accounts payable process can help you to pay your bills on time!

What is the best way to manage your AP?

There are many ways to manage your Accounts Payable.

You could pay each bill the moment you receive it. This is often not practical since it means pulling out a checkbook, going to a vendor’s website, or entering information into your bill pay when the mail comes every day (or more likely, whenever you receive an email requesting payment). Along with the impracticality of being interrupted by bill paying on a regular basis, you may not have funds available to immediately pay a bill that isn’t due for 30 or 45 days.

You can have a folder set up on your desk with all the bills inside and rifle through it occasionally to figure out which bills are due. This may work while you’re a very small business, but it’s not going to serve you well in the long run. There’s a reason that large corporations have entire departments devoted to Accounts Payable.

Ideally, you’ll enter each bill into your accounting system along with the vendor’s name, bill amount, when it was received, and when it is due. Your accounting system will then produce reports such as an Accounts Payable Aging Report that show which bills are current and if you’ve fallen behind with any vendors. It’s best practice to have one person enter the bills and a second, independent person sign the checks or approve the payments.

If you are a large company, it probably makes sense to have internal people managing bill payment and tracking. But if you’re a small business, it often makes sense to work with an experienced bookkeeper or accounting service. After working with you to gain an understanding of your business and operations, they’ll be able to handle the Accounts Payable system and work with you to make sure that everything stays current and hassle-free for you.

No matter what size business you have nor how complicated your business finances are, Accounts Payable plays an important role in the expense side of your Profit and Loss statement. 

Want to dig deeper than our simple introduction to accounts payable can offer? Check out this Udemy course for advanced AP training.


Looking for an outside bookkeeper to handle your accounts payable for you? Reach out to My OC Bookkeeper! At My OC Bookkeeper we are experts at helping businesses with their accounts payable. Not only that, we can help you with all kinds of issues related to accounting, bookkeeping, outsourced CFO services, and general business consulting. Click on the surfers below to learn more.

6 Things to Look For When Hiring an Accounting Professional

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The advantages of retaining the services of competent and experienced accountants are numerous. Professional accountants maintain track of your business’ revenue, assets, and obligations, allowing you to focus on building your business rather than worrying about taxes. 

Accountants assist you with tax filing, auditing, and payroll services, as well as preparing and examining financial records. They can assist with tax planning, financial statement preparation, and company choices. 

However, with so many professional accounting firms to choose from, finding an accountant who can assist you might be difficult.

Know What You Need When Hiring an Accounting Professional

Prior to the hiring process, it’s a good idea to choose what type of tasks or roles you want the accountant to do for your business. A non-certified accountant or bookkeeper may be needed if you want monthly financial statements and accounting services. Your company may need a CPA if you need help with tax planning, forms, or detailed financial statements.

Have a Budget in Mind

Many accountants offer a monthly fee that includes tax preparation. Other accountants charge a monthly price for accounting services and then separate fees for the company and personal taxes. Before deciding which vendor to use, find out how they expect to be paid. 

For the services provided, not all accountants or accounting companies charge the same rate. In terms of what you get for your money and the credentials of the applicant delivering the services, it can vary. For accounting services, several accountants have a fixed cost, while some charge a yearly fee for a specific list of services, including taxes. 

It’s always a good idea to try negotiating how you pay depending on your financial flow. Before you choose someone, make sure you have a budget in mind.

What to Look For When Hiring an Accountant

Knowledgeable and Experienced 

An accountant should have practical knowledge, which should be backed up by experiences, in addition to degrees. A firm may confront a variety of financial and accounting challenges in real life, which an accountant will be able to address only if they have prior expertise in the sector. 

Inquire about the sectors in which their clients operate, as well as the specific elements of those businesses.

Approachable

You may not be familiar with accounting language or technical details. It would benefit your business if the accountant is personable and ready to explain things to you in the simplest way possible in such cases. 

If your accountant is not approachable, it may damage your financial comprehension. Every business has its own lingo, so if you don’t understand something, ask for an explanation.

Great With Technology

Your accountant should be computer literate. They must be well-versed in the most recent accounting software programs to assist you and your staff in selecting the finest solution and increasing productivity. 

You also don’t want an accountant that keeps track of your finances using Excel spreadsheets. You must ensure that they are current with technological advancements in their industry.

Qualifications

The essential factors for success in the accounting sector are educational credentials and certifications. Solid work with a competent accountant guarantees that they have a working understanding of accounting theory. Don’t be afraid to ask for proof of qualifications. 

You can go online and look for their name in the database. Inquire about their certifications, or search about the workplace for them. Inquire about the training courses they’ve completed.

Someone Who’s Organized

Every accountant examines a large number of papers, both physical and digital. The last thing you want is someone in your office who is messy or unorganized. If they are not methodical, they will become overwhelmed by the sheer number of data, papers, and archives. 

As a result, it is critical for an accountant to be well-organized in their approach. If they are well-organized, they will be able to provide answers quickly, which will be quite beneficial to you as a client. 

Attention to Detail

Accounts may be responsible for creating reports including vast volumes of data. They could be in charge of examining these sorts of reports at a senior level. It’s vital to be able to recognize and correct any mistakes; if they produce or accept an incorrect report, it will reflect poorly on their talents. 

This meticulous attention to detail, however, should not cause you to lose sight of the greater picture. Is the information in the data relevant? Is the report they’ve written in accordance with the reader’s other information? Keeping these considerations in mind will assist you in establishing a qualified accountant for your company. 

Perform a Background Check

Before you sign on the dotted line, speak with some of your potential accountant’s clients. There are professional services that can assist you with this, but if the accountant is genuine, they will most likely be prepared to provide you with a list of references. 

This will help you verify some of the information supplied by the accountant. It will also provide you the opportunity to learn firsthand about the accountant’s connection with their other clients. 

Interview Multiple People 

Don’t take the first offer you get, just like you wouldn’t accept the first offer you get in life. Arrange your expectations in such a way that you may compare several accountants. Then you’ll be able to figure out which one is ideal for your company. 

An interview may be a useful tool for determining how well you’ll get along with someone. Furthermore, a series of interviews will not only assist you in better defining the sort of accountant you want but will also provide you with vital free advice. This may even assist you in better defining your company requirements.

Bottom Line 

There’s a reason why everything sounds more like a marriage than a business arrangement. It’s not a decision to be made lightly because your accountant will get closely involved with the running of your business. You’ll need someone you can rely on, who has the required expertise, and who will be available when you need them.


We hope you enjoyed our article on hiring an accounting professional.

We hope this article on what do CFO services do for your businesses was illuminating and answered many of your questions. At MY OC Bookkeeper, we pride ourselves on providing the best accounting services in Southern California. We also offer bookkeeping services, outsourced CFO services, and business setup services.

You can reach us by phone at 949-345-0639, email us at admin@myocbookkeeper.com, or contact us here.

Outsourced Accounting Services | 8 Reasons Why You Need a Seasoned Accountant in Your Corner

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Proper financial management can make or break your business. Most small business owners choose to go it alone and not bring an accountant onto their team. You may be thinking that you can handle it, or that an accountant isn’t worth the money, but what is the cost of not getting one? If you are not keeping your books and accounting properly you could:

  • Fail to claim expenses that are value and miss out on tax breaks
  • Fall behind on invoicing
  • Get in trouble with the government due to underestimating your tax bill
  • Get fined due to late tax return and compliance paperwork filing
  • Have books with mistakes that can take hours to fix
  • Not be able to make real-time decisions because you don’t have access to the information you need on-hand

These are just a few things that could happen without outsourced accounting services with a seasoned accountant in your corner. The following are eight reasons why you shouldn’t be handling your accounting all on your own and should hire a professional.

Your Time is Valuable

If you choose not to have an accountant, you’re stuck doing your taxes yourself each year, or you are having another employee doing it. However, if you or the employee are stuck putting in hours and hours of work on taxes, then there is no time to be doing what is otherwise required of you or them. If you have the time to do this, then it could work, but only for a little while. As your business grows, you’ll have less time to do any work that is not the work that pays.

Taxes Don’t Have to Be Stressful

Taxes can be stress-inducing, but they don’t have to be as stressful as you think. If you have an accountant in your corner, then you don’t have anything to worry about if you get a letter from the IRS. An accountant can eliminate the stress of taxes because they will be ensuring your business’s finances are all accounted for.

Hiring a professional will also eliminate the stress of having to do it all yourself. Your sanity is important, and a key factor is running your business smoothly—keep your sanity by handing your finances over to someone who knows what they’re doing.

Your Business’s Financial Health is Important

Without a bookkeeper keeping tabs all year, you may not be totally aware of how well your business is actually performing throughout the year. A professional can keep tabs on your revenue, expenses, and performance throughout the year. This can help you to have a better understanding of your cash flow, determine the market patterns that are beneficial for you and the business, and identify circumstances that can reduce costs. A professional accountant can monitor all of these things which can enable you to make better decisions overall for your business.

Outsourced Accounting Services Allows for More Growth

There are always going to be circumstances that grow the business but make finances more complicated, whether this is expanding the number of in-house employees or signing a new contract. While you may have been able to manage your finances at first, in order for your business to grow you need to be able to handle it financially. A professional will be able to keep up with business growth, ensuring that all laws and paperwork is meeting the requirements.

Your Financial Plan May Not Be the Best for You

Having a solid financial plan allows you to better assess the business’s growth. If you properly plan, you can keep tabs on the capital required to start and grow the business, as well as the revenue, expenses, and profits.

In addition, a professional can also help you to determine the best legal structure for your business. While most small businesses think that sole proprietorships are the best and simplest option, an accountant will be able to help you determine the legal risks that can accompany your current legal structure and whether another one may be more beneficial.

You Can’t Afford to Make Mistakes

Not only will tax and accounting mistakes cost you time and effort to correct, but they will also cost you money. While you may not make any mistakes, there is still always a risk if you’re doing your accounting and bookkeeping yourself.

These mistakes can cause an audit, make you miss key tax deductions, have you spending resources on services that aren’t profitable, on top of many other things. Correcting all of these mistakes is something that you may not have the money for, but also something you can avoid altogether by hiring a professional.

You Aren’t a Pro

There’s no denying that you are not equipped with the knowledge and resources that a seasoned accountant is. At the end of the day, professionals are able to handle things that are thrown their way.

They are also aware of all the possible issues that could arise because they’ve seen a lot and they work hard to avoid these issues. You may not even know what half of these issues are so how can you expect to be proactive? You aren’t a professional accountant, so it’s better to leave these things to the professionals.

Advice Whenever You Need It

Aside from handling taxes, having an accountant in your corner allows you access to them whenever needed. You then have access to all of the information that they’ve gathered through their monitoring of the company finances. Most importantly, this allows you to make decisions in real-time with information at your fingertips, which is both more professional and more efficient.

Keeps You Focused on What’s Important

Even though you may not be a professional in accounting, you are good at what you do for your business. You are a key asset to the business, helping it to grow and thrive with your own unique expertise. By hiring an accountant, you are able to stay focused on what you do best. Furthermore, you’re able to stay on top of the things that are important to the business aside from the finances and legalities.

We hope you enjoyed our article about outsourced accounting services and how important it is for the success of your business. MY OC Bookkeeper has the experience and expertise to help you with bookkeeping, accounting, outsourced CFO services, and setting up a business. Make sure to contact us here for a free consultation.

What Are The Differences Between Cash Accounting and Accrual Accounting?

A professional using a computer and a notepad for accounting work

The Differences Between Cash Accounting and Accrual Accounting Are Key For Your Business

One of the first decisions a new business needs to make is which accounting method they will use to record their financial transactions. To make this decision one first must know the differences between cash accounting and accrual accounting. (Which are sometimes also referred to as the cash basis and the accrual basis.) Accounting methods are some of the most important, yet most commonly misunderstood principles of accounting, so let’s break them down.

What are the differences between cash accounting and accrual accounting?

The main difference between cash and accrual accounting regards the timing of recording transactions. In cash accounting, financial transactions are recorded once cash is exchanged. In accrual accounting, however, financial transactions are recorded at the time the revenue and/or expense is earned/incurred, regardless of when money is exchanged.

For example, say you operate a landscaping business. In January you mow a lawn for a client, but they don’t pay you for the service until February. In cash accounting, you would wait until you receive the cash in order to record it, meaning you would record the transaction in your February books. In accrual accounting, however, you would record the transaction the moment the service is rendered; You would record the transaction in your January books.

What if the situation is reversed? What if a client pays for a service before you have provided it? The same rules apply in this scenario. Say you were paid to mow the lawn in January, but you didn’t complete the service until February. In cash accounting, you would record the transaction in your January books, because that’s when you received the cash. If you are using the accrual method, you would record the transaction in February, because that’s when the service is completed.

The same is true regarding expenses. In accrual accounting, you record the expense the moment you incur it. Say you buy a new lawn mower in January, but you bought it on credit and don’t need to pay until February. In cash accounting, the expense would be recorded in February, whereas in accrual accounting, the expense is recorded the moment it is incurred, or rather, in January.

The other major difference between cash and accrual accounting is the types of transactions recorded. In the cash method, only the transactions regarding money exchanged are recorded. However, in accrual accounting, you record all transactions related to the business.

What are the benefits and disadvantages of the different methods?

Because there are fewer types of transactions to record, the cash method is much simpler and cheaper than the accrual method. It is easier to maintain and easier to understand. Another advantage of this method is you always know how much cash is available to you at any given moment. However, while the accrual method does require more work, it provides better financial insights and more accurate reports about the long-term health of your company. In cash accounting, you don’t necessarily track your assets, liabilities or equity. Meaning unless you take steps to monitor them, you may have no way of generating reports about your company apart from cash flow. (But don’t worry, we can easily do this for you!)

Another disadvantage of the cash method is it can sometimes lead to false conclusions about your profitability. Let’s go back to our landscaping business example. Here’s an imagined list of revenue/expenses for January and February.

  • January:
    • Billed customers for 5,000 in services completed in January
    • Received payments from customers 1000
    • Purchased new equipment on credit 800
    • Billed by outside contractors 1000
    • Paid outside contractors 700
  • February
    • Received 4,000 in payments from customers
    • Paid credit card bill 800
    • Paid outside contractors 300

Cash Method

JanuaryFebruaryTotal
Revenue100040005000
Expenses70011001800
Profit30029003200

Accrual Method

JanuaryFebruaryTotal
Revenue500005000
Expenses180001800
Profit320003200

These charts, while representing the same transactions over the same period, present two very different scenarios. If you looked at the cash chart, you would think February was your more profitable month. In reality, you didn’t earn any income at all in February, but rather collected payments for services already rendered.

As you can see in this example, the accrual method is a more accurate depiction of how your company is actually performing. Still, there are downsides to the accrual method as well. For example, because you are recording transactions when the services occur as opposed to when the money actually comes in, your books won’t match your bank statements. Additionally, you will be unaware of what your cash situation is. This can be disastrous for a business if you aren’t monitoring your cash flow in other ways. You may end up short on cash without realizing it and be unable to pay your bills, even though the long-term health of your company is stable.

How do the cash and accrual methods affect my taxes?

It’s important to decide early on which method you want to use because the IRS requires individuals and businesses to file their taxes using the same method each year. In other words, once you file one way you have to file the same way each year. Later if you wish you switch methods, you have to file a special request with the IRS.

The method you choose can also have an effect on your year-end taxes. If you use the accrual method, for example, you may end up paying taxes on money you haven’t actually received. For example, if you use the accrual method and you invoice a service in December 2017 for 1,000, but you don’t end up receiving the money until later, the transaction would still be recorded as part of your 2017 taxes. Therefore, another cash method benefit is that you don’t pay taxes on any income until you actually receive the money.

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What method is right for me?

Most individuals and small business use the cash accounting method. This method is much simpler and faster than accrual accounting. If you don’t have a lot of accounts receivable or accounts payable, the cash method may suffice for your business. Especially if you are a business with a lot of cash transactions and are dealing with customers directly, the cash method may be right for you.

If, however, you are a larger business and you don’t get paid quickly, accrual accounting is probably your best option. In fact, the IRS requires certain types of business to use accrual accounting. If your company makes more than five million in revenue, for example, the IRS requires that you use accrual accounting. Additionally, if you are audited, the process will be a lot easier if you use accrual accounting because you have detailed reports about every financial transaction you’ve made.

There you have it, the basic differences between cash accounting and accrual accounting. Still unsure about which method is right for you? Contact us now for a free initial consultation! Want to learn more? Check out our YouTube channel or our blog for all kinds of great accounting, bookkeeping, and business tips.