Why accrual-based accounting?
There are two choices for accounting methods: cash-based and accrual-based. Cash-based accounting records expenses and revenues at the time they are paid, which makes it very simple to establish how much cash the business has on hand, but makes no attempt to forecast how much cash the business owes or is owed. For that reason, it's favored by small businesses of the traditional kind, which tend to pay for bills as they happen or collect payment upon goods or services rendered.
Investors and partners all prefer that startups use the accrual-based accounting method, which paints a much more accurate picture of the current and future health of the company. Expenses are reported when the expense occurs, not when the expense is paid—this results in income statements that more accurately reflect company profitability. In part, this is due to accrual-based accounting's usefulness in representing the costs and revenues the business expects to realize, which better maps to the expectations of a startup's lifecycle. Accrual-based accounting is also required by Generally Accepted Accounting Principles (GAAP). In addition to its benefits, though, accrual-based accounting makes no attempt to represent the actual amount of cash on hand, which can become a problem for startups that do not pay attention to their bank accounts.
Last updated on October 3, 2018