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Accounting Best Practices: Three Reasons to Switch to Accrual Based Accounting

Author : Dennis Najjar
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Tax time is often a time when companies revisit their processes and procedures to see that they’re operating in a way to maximize profits. Many small businesses with revenues up to $20 million might even re-visit their accounting methods. If you’ve been using the cash-based method of accounting, it may be time to switch to accrual based accounting. Here are three reasons it could be time to make a change in your small business accounting methods.

1 – Your company has grown to the next level. – Maybe you’ve hired more employees (or moved from being a sole proprietor to a company with several employees), you’re bringing in more revenue, and you’ve gotten to the point where it’s time to make sure you’re doing things “by the books.”

The GAAP accounting principles recognize accrual-based accounting as accounting best practices for businesses with revenues greater than $1 million … and even for some small businesses, too.

2. You have an opportunity to bid for government contracts – The promise of government contracts is sometimes the “next big step” for growing small businesses. If you intend to bid on government contracts, the government might wish to review your financial records. The government will expect your records to meet GAAP accounting principles. Your accounting department is required to use the accrual-based accounting method to meet GAAP standards.

3. You need better financial control of your company – Accrual-based accounting is not the easiest of the accounting methods, but it follows accounting best practices based on the GAAP standards and can give you a more clear financial picture of your company, month to month.

Accrual based accounting will give you the financial information you need to run your company, not just do a tax return.

Look at it this way: Let’s say, for whatever reason, you paid January’s phone bill in February. Your profit & loss statement will list zero for phone expenses in January and $1000 in phone expenses in February. We know this isn’t really the case, but it would show up that way in your books because both bills were paid in the same month.

It’s impossible to get a clear picture of your fixed and variable monthly expenses using cash-based accounting. This can be okay if you’re a sole proprietor, but if you’re a small business owner with annual revenue greater than $1 million, who has to make payroll on a specific schedule, you should be using accrual based accounting.

If your business is making the shift to accrual based accounting, you’ll need a professional bookkeeper, trained in the GAAP standards, to keep your books. If you’re ready to step into the world of accrual-based accounting, why not give us a call for a free consultation and quote?

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