First things first, accounting is a basic need for every business,
and seeking professional service for it is essential for the success of any
kind of organization. There are many kinds of accounting and a number of
methods and utilities available for carrying out the job of an accountant. But
these details are best known as the professionals themselves.
Every company follows a different set of rules while setting up
and maintaining its books and financial accounts. These sets of rules
constitute varying methods of preserving and maintaining accounts. Two common
methods of accounting are Cash accounting and accrual accounting methods.
This article aims to throw light on the key differences between
the two main methods of business accounting.
Cash and accrual accounting: Four points of comparison
Financial information of any company is very important not only
for the owner but also for the stakeholders. Business owners are leaders who need
to use this information for making key business decisions and projecting the
future prospects of hire ventures. For capitalists and investors, it is
pertinent to know the extent of risk and certainty pertaining to their
investment.
The rules that a company follows for keeping records and finances
in check serve as the deciding factor for the accounting method used there.
Following are the two key accounting methods dissected in terms of differences:
1. Simplicity of process
The cash method is simple in terms of the details it keeps track
of. You only account for the cash that you receive or pay. This simplicity is
the key advantage of going for the Cash accounting method, which Accrual
accounting does not offer. Accrual accounting is complicated in its
implementation because it incorporates some elements which are difficult to
monitor.
But even for a simple method of Cash Accounting, you need to be
sure that the accounts are managed by an expert. For this purpose, you need to
seek professional services of bookkeeping and accounting firms in Dubai to ensure that accuracy in the representation
of pertinent information. You will be able to track the cash flows with ease as
compared to that in the case of the Accrual Accounting method.
2. Payable and
receivables
The accrual method involves the incorporation related to the
details of receivables and payables. In this way, it serves to be more accurate
in the representation of the financial health of a business corporation. All
expenses when they occur and all the profits from various sources when they are
earned are included in the books in case of Accrual accounting.
The accrual method of accounting thus provides a better picture of
the profitability of a company and serves the need of investors much better
than cash accounting methods.
3. Cash flow tracking
The accrual method, while useful for recording the receivables and payable, has a downside as well. This mode of accounting does not incorporate
the tracking of a company’s cash flows. It means that if your company is faced
with a shortage of cash for a short period of time, the accounts will not be
able to reflect that nuance. Professional bookkeeping
and accounting services are necessary to weigh the pros of cons of each method
before deciding one of these two for your company.
4. Overstatement on finances
A cash-basis account may sometimes overstate the health of your
organization’s finances. Companies may be rich in cash, but the large sums out
of the cash in the account need to be paid. In short, the payable amounts may be
much higher than the cash that is represented in a documented form. The
analysis of an investor may be based on a misplaced assumption that a company
is rich or vice versa.
If you want to avoid getting a picture of finances that may be
misleading to a stakeholder or the decision-makers, for that matter, you need
to rely on the accrual method instead of the Cash method.
Are your company’s
accounts accurate?
Accounting serves multiple purposes for a company. Different
methods of accounting have a distinct set of advantages and disadvantages. If
you want to informed decisions based on well-sorted documents and financial
information, you need to be sure the books and accounts of your company are in
good shape. Ensure that these records are free of inaccuracies and
misrepresentations.
For this purpose, you need to seek the professional help of
account and bookkeeping experts. You can outsource such resources from
experienced firms that operate in every part of the world, be it the Middle
East or Europe. Just make sure that their reputation is excellent in their
field. In this way, you will be able to do better business and set practical,
realistic, and achievable goals for your company.
All you have to do is to set your priorities right and act
accordingly. You must ask the accounting professionals to choose the accounting
method which suits your business goals.
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