The Difference Between Cash And Accrual Accounting Methods

Keeping your business’s accounts in order can be a time-consuming task, with plenty of pitfalls along the way if you don’t pay attention to detail. For this, you might find it better to hire accounting services in Halifax if you’re not the type to do well with numbers and spreadsheets.

One of the first things an accountant will do is ensure that your business is following the appropriate accounting method. 

Unless you’re a farmer, fisher, or commission sales agent, the Canadian Revenue Agency (CRA) would prefer all businesses to report their income and expenses using the accrual method rather than the cash accounting method.

Let’s take a look at some of the difference between the two methods.

Cash Accounting Method

The cash accounting method is the simpler method, as it tracks actual cash that comes in and goes out of the business. This therefore only relfects the actual cash position of an entity for the period under review.

This method does not anticipate the receipt or payment of debts, opting not to count those in as the value they represent does not phsyically exist yet. 

The cash accounting method can have useful tax benefits, as one can time payments to suit the tax period. Since this method allows you to control the timing of your transactions, you can speed up expenses and slow down revenue, creating a more favourable tax position.

Accrual Accounting Method

The accrual accounting method works the other way around and is generally viewed as the more accurate method for calculating the true value of a business. This is becuase it not only looks at the cash position of a business, but is also considers the value of the business against its debts.

Accrual accounting is different from cash accounting in that it takes into account all money owed by and to the business, even if the money has not yet physically been paid yet. This means that accrual accounting is complex and can be decieving, as it accounts for intangible gains or losses in value which have not yet been visualized in the real world.

The accrual accounting technique is, therefore, better suited to larger, more complex organisations, where medium to long-term strategies depend on the ability to see ahead in terms of the company’s finances.

Accural acocunting makes this possible, and is therefore a useful method for making decisions.

For expert accounting services in Halifax, contact Kevin Martin Accounting today!