You may be overwhelmed with the huge amount of orders, and your bank account may now be loaded with money. While your eCommerce business may seem to be doing well, you may not be sure what you are supposed to do with your financial information. You may be wondering if you have to input that information in a spreadsheet or if you have to show your accountant your sales numbers. As a result, it’s easy to feel stressed about your financial records, especially if you have limited knowledge and experience.
As a business owner, it is crucial to your business since it lets you understand your financial health, make well-informed business decisions, and file your taxes correctly. The first thing you have to do is choose between the two accounting methods: cash basis or accrual.
Although you can change your method, you have to undergo a government process, which can waste your time and money. Therefore, you need to have a firm decision. Learn the difference between the two methods through this guide.
What is Cash Basis Accounting?
Cash basis accounting involves adding a new record when you receive cash and pay your expenses. It lets you record all the transactional information in your books and informs you how much cash you have at your disposal. It also saves you from stress and hassle when reporting business taxes at the end of the year because you won’t have to pay income taxes on the payments you haven’t received yet, and it’s simple to maintain.
All you need to do is is report on all your money movements as they happen. Because of this, many small eCommerce businesses, maker businesses, products-on-demand stores, and more use it. On the other hand, it may not be the best choice for you if you have a larger eCommerce business because it does not recognise accounts receivable or accounts payable.
What is Accrual Accounting?
Accrual accounting, known as the traditional accounting method, involves recording revenues and expenses when earned, regardless of when it is received or paid. Most financial institutions use this if they are interested in learning about your business’s financial situation, including auditors, lenders, and investors.
This accounting method may seem more confusing than cash basis accounting because you need to compute the money you haven’t earned yet. You also must subtract costs you haven’t even paid. Fortunately, you can hire top eCommerce accountants, helping you see a more realistic representation of your income monthly. As a result, you can make more accurate financial projections and consider your present and future financial obligations.
The downside of accrual accounting is it can make your business look more profitable than it actually is. You can address this issue by keeping a closer look at your cash flow.
Running an eCommerce business requires you to stay on top of your financial health. To do this, you have to identify which accounting method you should use. This way, you can keep your finances organised and well-managed and get a clearer picture of your financial situation. If you’re having a hard time determining which method is best for your business, you are always free to work with a company specialising in accounting for eCommerce.
Let The ECommerce Accountant provide you with the accounting services you need. Our highly trained accountants and bookkeepers specialise in serving eCommerce businesses and influencers in Australia. Book a free strategy session now!