Every small business - whether a respected local mom-and-pop retailer, a startup tech company, or an online venture — has accounting and bookkeeping responsibilities, including selecting the accounting method that works best for them.
If you’re new to small business ownership, you might not even realize that there are multiple ways to keep tabs on your company’s finances.
Don’t worry, though, that’s where this guide comes in. As you keep reading, you’ll learn more about two common business accounting methods, and get helpful advice for choosing the right one for your business.
What are the most popular business accounting methods?
The two most popular business accounting methods are the cash method and the accrual method. As with anything, there are pros and cons to both tactics. Let’s take a look at what distinguishes each of them, and how to determine which is the best fit for your company’s needs.
First, you need to understand that each of the accounting methods is a way to track your incoming and outgoing money.
Fundamentally, the biggest difference between these two accounting techniques is whether you track revenues and expenses when they are actually in (or out) of hand or when they are billed.
While there are many factors you’ll need to consider before choosing a method for your small business, evaluating the following will help you:
The size of your business
Your business’s future growth projections
Whether you are a sole proprietor or a corporation/publicly traded company
Whether you have (or plan to have) investors involved in your business
While most sole proprietors and small businesses have the freedom to choose the accounting method that they feel most comfortable with, companies that have investors will likely need to use the method that their investors want them to based on a vote.