Cash accounting is an accounting technique that records revenue when it’s received and expenditures when they’re paid rather than when they were incurred. Small enterprises usually utilize the cash accounting method. The company’s (Also see Do Your Company Need Interim Reports?) bookkeeper records revenue and expenditures only when the money is received or spent using cash accounting. To put it simply, the accounting records will match the days when cash leaves or hits the bank account. In that case, your actual earnings and margins would match what is recorded in the statement. However, if accounting is not your thing, you should get assistance from the accounting firm in Singapore.
Here, we will find out how cash accounting works, its advantages and also disadvantages.
How Does Cash Accounting Work?
Most of the small enterprises would use cash accounting for its simpleness. Cash accounting is usually compared to accrual accounting, which records revenue and expenditures whenever they were incurred. Under cash accounting, companies pay taxes only on the revenue they have received. Your earnings will not be taxable for the current tax year if you send an invoice during the current tax year but are not paid till the following tax year. Rather, it would be factored right into your revenue for the following tax year. Using the cash account method does not mean you can postpone paying checks to delay the settlements on taxable earnings. The cash must be reported when you receive a settlement.
The Advantages of Cash Accounting:
- Straightforward: Cash accounting is a straightforward technique; you are required to record the revenue and expenditures whenever you receive or spend the cash.
- Earnings are not taxed before receiving: You do not have to pay taxes on your earnings till the next tax year if a settlement is still pending at the end of your financial year.
- Simple to use: The technique’s simpleness does not need an extensive understanding of bookkeeping or accounting.
The Disadvantages of Cash Accounting:
- Inaccurate: Since the income and expenditures might have been earned or incurred in a previous month(s), short-term and temporary cash flow analysis can be inaccurate
- No records for trade receivable and trade payable: There are no trade payable or accounts receivable due to cash accounting not showing any pending amounts.
- Not popular amongst loan lenders: Loan lenders might not rely on the accuracy of financial statements (Also see The Essential Role of Bank Statements in Financial Management) under cash accounting, which might impact your possibilities of getting authorized for funding.