GAAP stands for generally accepted accounting principles. GAAP is the basis for accounting rules, policies, and procedures. While GAAP rules apply to many things, one area includes accounting procedures. In other words, businesses can choose from three main types of methods to run the business. In this post, Bayou Bookkeeping & Tax Services explains each and which accounting procedure is best for small businesses.
Three Types of Accounting Procedures
There are three main types of accounting procedures: cash-basis, accrual, and hybrid. Each impacts bookkeeping and has its advantages and disadvantages, so choosing the right one for your small business is essential.
In cash-basis accounting, businesses only record transactions when cash changes hands. For example, if you sell a product or service, you wouldn’t record the sale until the customer pays you. The benefit of this method is that it’s simple and easy to understand. The downside is that it doesn’t give you a clear picture of your business’s financial health because it doesn’t include money that’s owed to you (accounts receivable) or money that you owe (accounts payable).
In accrual accounting, businesses record transactions when they occur, not when cash changes hands. So, if you sell something in February but don’t receive the funds until June, you still account for it in February. The benefit of this method is that it gives you a more accurate picture of your business’s financial health. The downside is that it’s more complicated than cash-basis accounting and can be challenging to understand.
Hybrid accounting is a combination of cash-basis and accrual accounting. With this method, businesses record some transactions when they occur and others when cash changes hands. For example, you might use accrual accounting for inventory but cash-basis accounting for everything else. Hybrid accounting gives you a more accurate picture of your business’s financial health than cash-basis accounting while still being simpler than accrual accounting.
Which Accounting Method Is Best for Small Businesses?
Each accounting procedure—cash, accrual, and hybrid—offers pros and cons. The best method for your business depends on several factors, including the size of your business, the type of products or services you sell, the industry you’re in, and your accounting knowledge.
Simplicity and Ease of Use
Cash-basis accounting provides advantages if you have a small business and are looking for an accounting procedure that is simple to understand and use. However, if you need more accurate financial reporting, accrual accounting or hybrid accounting may be a better choice.
Product Versus Service-Based Business
The method you choose also depends on your products or services. Accrual accounting may be a better option if you sell physical goods because it records inventory sales when they occur. On the other hand, service providers may benefit from cash-basis accounting because it records revenue when you receive payment.
Finally, the size of your business is another factor to consider when choosing an accounting procedure. Accrual accounting provides more accurate financial reporting if you have a large company with many employees and customers. Cash accounting may be a better option if you have a small business with few employees.
Bayou to the Rescue
No matter which accounting procedure you choose, Bayou Bookkeeping & Tax Services can help. We have experience with all types of businesses and can assist you in choosing and implementing the proper procedure for your business. We also offer financial reporting, tax filing, and more. Check out our membership packages and call (225) 442-1137 today to learn more.