Finance Corner: Scott Tominaga on the Two Types of Accounting

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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.

 

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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.