Any business needs a clear record of all monetary transactions coming in and leaving the establishment, because this is what indicates whether it is financially stable of not. Cash accounting also known as cash-basis accounting is one of the financial recording approaches mostly used by small business establishments.
Under this particular approach any financial transaction is recorded when it is actually incurred and not before. This includes all debit and credit financial transactions, which means that if the business has received an order to deliver commodities, the income to be earned from this business transaction, will be recorded when the delivery is finally made and those are paid for and not before.
Hence, when the order to deliver is formally received, there will be no record of the income expected to be realized after delivery and this will only be reflected when the money comes in. same case applies to the expense that the business incurs. If it has ordered certain services and payment for the same is to be done in future, the expense will not be recorded even if the service is rendered in the now but will only be reflected when this expense is paid on the due date.
The challenge with cash accounting is that it does not reflect the actual financial position of a business and what may appear as a stable situation may not be the case in the real sense. Corporations on the other hand, do not use this particular financial recording approach but rather make use of accrual accounting and this has to be in accordance with acceptable accounting principles.
Cash accounting is totally different from accrual accounting the major difference being when the recording is actually done. The latter takes to account all revenues and expenses incurred and are recorded as soon as an order to deliver is made or a service or goods for the organization are requested whether the income or expenses have been realized physically or not.
Opting to use cash accounting will limit you to some extent but it will still reflect the actual financial status of your small business in the course of time. Hence, if you opt for this, it would be wise to incorporate accrual accounting too for you to remain in touch with actual financial figures as far as your establishment is concerned.
Failure to do this can have far reaching effects that will not only affect you the operations of your business but also the survival of the same in the near future.