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Which E-commerce Accounting Method Is Best: Accrual or Cash?

Deciding which e-commerce accounting system for your business depends on the size of the business, how much sales revenue it generates, and whether the company needs to provide financial information to shareholders.

Our team of experts will help you find the best accounting solution for your business, ensuring that it is tailored to your unique needs. We will provide you with a comprehensive and efficient system that will make it easier to track your financials, keep up with compliance, and create larger strategic goals, starting with this guide:

The Overview

The essential distinction between accrual and cash accounting is when revenue and expenses are recorded. Cash accounting immediately registers income and expenses, while accrual accounting is based on expected revenue and expenses that are likely to occur in the future.

Accrual accounting records any income earned and expenses incurred when they happen, regardless of when the money is exchanged. This way of accounting provides a more accurate picture of a business's financial performance, as it takes into account accounts receivable and payable.

It is different from the cash method as it records revenues when goods and services are provided, even though money has yet to be received. This means revenue is recognised even before the money is in the bank. Additionally, all expenses are recorded when they are incurred, regardless of when any cash is paid out.

Accrual accounting is the most favoured by large businesses, especially public companies since it gives a more comprehensive view of earnings over time. On the other hand, smaller companies usually opt for cash basis accounting.

Conversely, cash accounting is a way of keeping track of financial transactions by recording income and expenses only when money is exchanged. It is mostly used by small businesses and individuals to monitor their finances. This method of accounting only recognises income when cash is received, and expenses are only registered when cash is paid out.

The Considerations

The accrual method of e-commerce accounting is popular among publicly-traded companies because it helps to even out their financial results over time, rather than having large spikes or drops in income or expenses due to when payments are made or received.

Cash basis accounting is less complicated, more immediate, and provides an easy way to track expenses and income. Consider the following:

  • Business size: An accrual accounting system may be better suited for companies with a larger scope of operations. This system tracks income and expenses over time and accurately represents the company's financials. This type of accounting allows business owners to see their financials over time and make more informed decisions.

  • Company status: Having a company on the stock market or about to be listed on the stock market may affect the Generally Accepted Accounting Principles (GAAP). Public companies have to represent their financial condition to their shareholders accurately. The most suitable way to do this is through the accrual basis of accounting.

In Closing

Some companies in between the classification of an SME and corporation or publicly-traded companies use hybrid accounting to make financial decisions. It combines loan applications, accrual accounting for larger decisions, and cash basis accounting for tax accounting. However, it is important to speak with an accountant or tax professional before using this system, as certain rules must be followed.

Consult with the ECommerce Accountant for Compliance and Increased ROI

Our passion for e-commerce accounting empowers, excites, and builds confidence in businesses through clarity in their figures. We’ll help you with accounting, financial figures, goal-setting, monitoring, cash flow forecasting, and more! Call (07) 5504-1999 to get started!

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