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Learning
About the Two Accounting Types with Scott Tominaga
Small business owners often take for granted the type of accounting system they use. In fact, they may be completely unaware of whether they employ cash basis or accrual basis accounting, instead leaving that choice to their accountant. Nevertheless, finance expert Scott Tominaga indicates that all small business owners should familiarize themselves with both accounting methods, including the benefits of each.
For
cash
basis accounting, the transactions are reported when money is
either spent or received. For example, you record an expense when cash is paid
for a new piece of equipment or when a customer pays you for services rendered.
In
contrast, with accrual basis accounting, income is recorded when earned, and deductions are
recorded when they are incurred. For instance, if a piece of equipment is
purchased by a company and is expected to last five years, its cost is spread
across its lifetime. The result is that the company's earnings are smoothed,
and its books more accurately reflect the company's true financial health.
topaccountingdegrees.org
Scott
Tominaga mentions the company owner's choice depends on several factors. For
this, finance experts and tax accountants should be consulted. Cash basis
accounting is usually more intuitive and easier to understand for someone not
well-versed in accounting. In contrast, the accrual method is more complicated
but preferred by most companies. In addition, some business types, such as C
Corporations, can no longer use cash basis accounting in the United States for
tax purposes.
Based
on the information above, which type of accounting do you believe best suits
your business? Share your thoughts with Scott Tominaga in the comments section
below.
ScottTominaga, the Chief Operating Officer of PartnersAdmin LLC, is an experienced professional in the areas of middle and back office, accounting, compliance, and administrative functions within financial services firms. He has previously filled primary roles in forming several operational infrastructures. He also interfaced with fund managers and professional service providers to establish efficient and transparent operations and reporting structures. For more about his work, visit this page.
