A common question when setting up your accounting system is whether you will use the accrual or cash method of accounting. If you are unsure which one to use consider this. The accrual method of accounting requires that you record your business activity when it happens. The cash method wants you to record your business when the actual money changes hands.
Let’s say you run a catering business and you have been contracted in May for a September wedding. Under the cash method, you would record the income only after you have received the acutal cash payments in hand. Under the accrual method, you would record the income only after you have completed the actual contracted work and the obligation exists for your customer to pay you, i.e. you may have sent a bill but not received payment yet.
The cash method of accounting requires less bookkeeping, but it does not necessarily provide an adequate account for transactions that are in process or partially complete. To find out which method best suits your business needs, contact a qualified accountant.
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