The Benefits of Cash Basis Accounting
Many small, service-type businesses (accountants, lawyers, consultants) opt for the cash-basis method of accounting. There are three main benefits to this method.
- Tax Benefits
- Less Bookkeeping Time
- Simplicity
Again, the choice between cash basis or accrual may have been made for you. If you sell traditional inventory items (Stock items, in Sage 50), you must use the accrual method.
Tax Benefits
If income is not recognized until received, you would have less income to report in a given year if cash-basis. Of course, the income not reported for December would be reported in January of the following year, making this a short-term benefit. Most small service organizations have more receivables than payables. Thus, it may be to their advantage to use cash-basis accounting.
Less Time/Simplicity
In cash basis, you could choose to not record customer or vendor invoices, or to record less information for them, since you have no receivables or payables accounts. Of course, if you record no invoices, you lose the benefits of aging or projecting cash flow.