Most entrepreneurs and small business owners use “cash basis accounting” for their books, both because of its simplicity and to comply with IRS tax rules. However, many of our clients have been asking about using accrual-based accounting and GAAP Basis, and what the difference is.
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Cash Basis: Simply put, transactions are recorded based on cash coming in or out of the business. While this is the most simple accounting method, it does not always provide owners with the best insights into the health and trends of their business.
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Modified Cash/Accrual Basis: Most of our clients prefer using the Modified Cash/Accrual basis, whereby the majority of items are accounted for on a cash basis, but key accruals are as necessary to provide consistency and comparability between accounting periods. For example, if a business purchases inventory that will be sold over the course of the next three months, rather than showing all of the expenses in the month it is purchased, the cost is accrued and expensed over the period that the inventory is used.
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GAAP Basis: GAAP stands for Generally Accepted Accounting Principles. This is generally only required for companies that are audited or have external reporting requirements such as bank covenants or 3rd party investors who require it.
Important Accruals for Small Businesses:
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Fitness/health club membership annual fees
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Payroll expenses for companies that run payroll bi-weekly (causing month-over-month fluctuations in payroll expense)
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Expenses that are paid on an annual basis like Insurance
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Prepayments for goods and services
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Depreciation of Fixed Assets and Leasehold Improvements.
If you are a Ceterus customer and have accrual needs that Ceterus isn’t addressing today, please contact your Financial Consultant to discuss them by emailing support@ceterus.com.
