Question

Is it more advantageous for a recent start-up, with revenues close to $23 Million over the last five years to operate on a cash basis or accrual basis? What are the major distinctions between cash and accrual method?

Answer 1

No it is not advantageous for startups to use cash basis of accounting.In many instances, startups adopt the cash method simply because the owners do not have adequate accounting expertise and so accounting is something of an afterthought. Consequently, many of these startups fail to hire qualified personnel to handle accounting operations, and the cash method becomes the quick and easy solution.

In cash basis of accounting, incomes are note recorded unless they are received in cash. Similarly, expenses are recorded only when they are paid in cash.

accrual basis of accounting-

In this process, incomes are registered when it is accrued or earned, whether the cash is collected or not, for instance, for a sales done on credit will be registered in the total sales of the term. Likewise, expenses are registered when it becomes due or incurred and not when the cash is paid for them.

Basis of Difference	Accrual Basis	Cash Basis
1.Prepaid&Outstanding Expenses / accrued &unaccrued Income in financial statements.	Under this, there may be prepaid or outstanding expenses and accrued and unearned incomes in the Balance Sheet.	Under this system, there is no prepaid or outstanding expenses or accrued or unearned incomes.
2. Variations of Income in case of prepaid expenses and accrued Income.	Under this basis, income Statement will show a relatively higher income	Under this basis, income Statement will show lower income.
3. Variations of income in case of outstanding expenses and unaccrued income.	Under this basis, income Statement will show a relatively lower income.	Under this basis, income Statement will show higher income.