Choose between cash and accrual accounting

Cash accounting tracks the actual money coming in and out of your business.

In cash accounting, when you:

• get an invoice for something – you don't record the cost in your books until you've paid the invoice
• send an invoice to a customer – you don't record the sale in your books until you get their payment.

For example, if you send an invoice on Tuesday, and don't get payment in your account until Thursday, you record the income under Thursday's date in your books.

Pros and cons of cash accounting

Cash accounting:

• is a simple system that keeps track of your business cash flow
• suits smaller businesses if you mostly have cash transactions (for example, a hairdresser or grocery store)
• gives you a picture of how much money you have in your till and your bank accounts.

However, it doesn't show money that is owed to you or money you owe to others.

If you use accrual accounting, you record expenses and sales when they take place, instead of when cash changes hands. This way of accounting shows the amounts you owe to people and the amounts owing to you.

For example, if you're a builder and send an invoice for a project you've completed, you record the sale in your books even though you haven't been paid yet.

Pros and cons of accrual accounting

Accrual accounting:

• is more complicated than cash accounting
• suits businesses that don't get paid straight away (for example, architects who provide a service then invoice for it later)
• tracks your true financial position by showing money owed to you and money you owe others
• is helpful if you deal with lots of contracts or large amounts of money.

Accrual accounting is more complicated than cash accounting so you'll need an in-depth understanding of bookkeeping methods or a professional to help you out.

To work out which method best suits your business, think about:

• the size of your business
• how complicated your business transactions and processes are
• whether you have the resources to manage accrual accounting
• whether using an electronic system will make a difference.

If you aren't sure, talk to a professional.