Accounting Methods and Where to Start

The accounting method you choose for your business will determine how you maintain the records of your business’ transactions for your fiscal year. The two main accounting methods to pick from are Accrual accounting and Cash accounting. The main difference between the accrual and cash accounting methods is the time frame in which you record your expenses and revenues.

Cash Accounting records revenue when cash is received and records expenses when cash has been paid. As opposed to Accrual Accounting that records revenue when a product or service has been delivered and records expenses when they are incurred.

The Pros and Cons of Cash Accounting

Businesses using Cash Accounting will not have any accounts payable or accounts receivable. This makes it easy to understand, doesn’t require any advanced accounting knowledge, and is easier for owners to track the actual amount of cash flow currently in their bank account. The downside to this method is that it provides an incomplete overview of the business’ finances. ie) If the business has incurred liabilities that are not yet paid, they could appear better off on paper than in reality.

The Pros and Cons of Accrual Accounting

Businesses using Accrual Accounting alternatively will have an accounts payable and accounts receivable. This paints a more accurate picture of the company’s revenues and liabilities, as well as allows the business to better forecast resources over the long term. While this method has it’s long term advantages, it does make itself more difficult to manage as you track your payables and receivables. As such, it takes a little more knowledge of advanced accounting and may require professional support to manage appropriately.

Which Method is Best For Your Business

It is important to mention that the Canadian Revenue Agency (CRA) requires all business owners in Canada to use the accrual accounting method in their reporting. However, if you are a farmer, fisher, or self-employed commission agent, you have the ability to report your income using either method.