Why We Use Accrual Accounting for Internal Reporting
At MJ Webb Bookkeeping, our goal is to provide you with the most accurate and insightful financial reporting to help you make informed decisions for your business. While there are two primary accounting methods —cash basis and accrual basis— we generally prefer to use accrual accounting for internal reports, unless a client specifies otherwise.
Let’s explore why and how each method impacts your business’s financial analysis.
What's the Difference?
CASH
This method records transactions only when funds actually change hands. Revenue is recorded upon receipt of payment and expenses are recorded when paid.
Pros: Simplicity and immediate reflection of cash flow.
Cons: Does not account for money that is owed or expenses that have been incurred but not yet paid, which can provide a misleading picture of long-term financial health.
ACCRUAL
Accrual accounting records revenue and expenses when they are earned or incurred, regardless of when the money is actually exchanged.
Pros: Provides a more comprehensive view of your business's financial status by including receivables (money owed to you) and payables (money you owe). This method aligns income and expenses in the period they occur, offering a clearer picture of profitability and financial health.
Cons: May not clearly show cash flow status without additional reporting.
Why We Prefer Accrual Basis for Internal Reporting
Complete Financial Picture: Accrual accounting allows us to report on revenue and expenses in the period they relate to, which is crucial for understanding the true profitability of your business operations.
Regulatory and Compliance Needs: For many businesses, accrual basis accounting is required by regulations, particularly if your company's sales exceed a certain threshold or if you hold inventory. It is also preferred by banks and financial institutions for any financial reporting related to loans and financing.
Future Planning & Better Decision Making: Accrual accounting helps in better planning and forecasting due to its detailed tracking of receivables and payables.
Aligning with Tax Reporting
It's important to note that the accounting method used for your internal management reports might differ from what is used for tax reporting. We recommend discussing these options with your CPA or tax professional to ensure your tax strategy is both optimized for compliance and advantageous for your business's financial goals.
While we recommend and prefer accrual basis accounting for the detailed insights it provides, we are also flexible and attentive to our clients' needs and preferences. If cash basis accounting is more suited to your immediate needs, especially for simpler businesses with straightforward transactions, we are more than capable of accommodating this method.