There are two major methods to record expenses and income. The timings and type of transaction decide which method to use. Let’s analyse cash accounting and accrual accounting to see the difference between these accounting methods.
Cash Accounting
The transactions are recorded when cash is obtained and accounted in the form of clients paying for products received or company paying for purchases. Cash accounting can be carried out even if your company sells goods on credit but the revenue or expenses might delay based on the date when the payment is actually received in the bank statement (Also see What is Bank Reconciliation?).
It is easy to track the cash flow (Also see Avoid These Mistakes When Forecasting Cash Flow) using cash accounting. Nevertheless, it is hard to track individual revenues against expenses because the products you want to sell later might be in stock and yet to be paid.
This might be the best alternative for you if you pay your income tax on cash basis.
Accrual Accounting
Transactions are recorded when they occur. Credit sales are entered as the account receivables until the payment is made. Products you purchase are recorded in accounts payable up until you pay for the items.
In accrual accounting, you can monitor all incomes against costs, but you could not track cash transactions quickly. The income statement does not reflect what you might have in the accounts. To make sure that you have sufficient cash flow to fund everyday company operations, it is recommended to do a cash flow analysis routinely.
Conclusion
Accrual accounting is accepted by Financial Reporting Standards (Also see FRS 1) due to its completeness of transactions and precise timings being reflected on the Trial Balance. On the other hand, cash accounting will be a better option for small businesses because the bookkeeping procedures are simple. The impact of using cash accounting instead of accrual accounting is little because material misstatement would not happen as the transaction volume is lower than big companies.
No matter what method you use, the crucial thing you have to comprehend is what records you need to translate (Also see Common Concepts in Accounting). Do not hesitate to contact any accounting firm in Johor Bahru for more information.