The Accrual Method of bookkeeping is almost universally considered the best method for the vast majority of growing businesses, as it provides the most accurate picture of your true financial performance and health. Bookkeeping Services in Cleveland.
However, the “best” method really depends on your business’s size, legal structure, and specific needs. You generally have two primary choices:
- 🥇 Accrual Basis Bookkeeping (The Most Accurate)
The Accrual Method is required by Generally Accepted Accounting Principles (GAAP) and is mandatory for most large companies and any business selling inventory over a certain size.
How it Works
Accrual accounting records revenues and expenses when they are incurred or earned, regardless of when the cash actually changes hands.
Revenue: Recorded when you issue the invoice or complete the work (earned).
Expense: Recorded when you receive a bill or use a service (incurred).
Why it’s the Best
True Performance: It properly matches revenue with the expenses that generated that revenue in the same period. For example, if you sell a product in December but collect the cash in January, the sale and the cost of the product are both recorded in December, giving you a clear, correct profit figure for that month.
Complete View: It tracks important items like Accounts Receivable (money owed to you) and Accounts Payable (money you owe), giving you a full, realistic view of your financial obligations and assets.
Scalability: It’s the only method that can accurately handle complex operations involving inventory, loans, and deferred revenue, making it ideal for growing companies.
- 🥈 Cash Basis Bookkeeping (The Simplest)
The Cash Method is the simplest to use and is often favored by small businesses, freelancers, and sole proprietors.
How it Works
Cash accounting records revenues and expenses only when the cash actually moves.
Revenue: Recorded when the cash is deposited into your bank account.
Expense: Recorded when the cash leaves your bank account.
Why it’s Popular
Simplicity: It perfectly aligns with your bank statement, making reconciliation and tracking very easy.
Tax Focus: It’s often used by very small businesses for tax purposes because it allows them to control when income is recorded (e.g., waiting until January to send an invoice so the income is deferred to the next tax year).
The recommendation: If you plan on growing, managing inventory, or ever need outside financing, start with the Accrual Method. Modern accounting software (like QuickBooks, Xero, etc.) makes the process nearly as simple as the cash method, minimizing the complexity while maximizing the accuracy.