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I’m starting my own event company and my accountant is asking me if I want to use accrual or cash accounting methods. She thinks accrual makes more sense for my business, but friends and family have said a cash method is easier. Which method do most planners use?
Disclaimer: Hire a certified accountant to properly advise you on what is best for your business.
Both methods have to do with how and when you recognize revenue and expenses for your company. There are pros and cons to each, but once you choose one method, it can get complicated to switch.
The cash accounting method measures business activity when payment is made or received, just like managing your personal check book. It is similar to a child’s lemonade stand. When a customer buys a glass for $1, you record $1 of revenue that day. When you buy lemons at the store the day before, that expense is logged the day before as well. Cash accounting typically features:
- Revenue and expenses are recognized when they are received and paid.
- Cash accounting usually does not make use of deposits paid or received.
- Cash accounting usually does not track money you owe vendors (accounts payable) or money customers owe you (accounts receivable).
The accrual accounting method measures business activity when it takes place, not when it’s paid for. If you produce an event that will take place in December, the revenue will be posted to December, even if the client pays you a large portion the following January.
- Revenue and expenses are recognized when they are earned and take place, regardless of when payment occurs.
- Accrual accounting does track deposits paid or received.
- Accrual accounting does track money you owe vendors (accounts payable) or money customers owe you (accounts receivable).
1. You provide site selection services to a client, for which the venue pays you a commission. The event occurs in March, but the venue doesn’t pay you until June.
- Cash: revenue is posted in June, when it’s received.
- Accrual: revenue is posted in March, when it’s earned.
2. Your company produces a $10k event that will take place in January. The client gives you a $5k deposit the prior November, and the remaining $5k in January.
- Cash: the $5k deposit counts as revenue in November, while the $5k balance counts as revenue in January. Event related expenses are similarly posted when you pay them.
- Accrual: The full $10k counts as revenue in January, when the services are rendered. Event related expenses are posted in January as well.
3. You provide 6 months of consulting services to a client for an event in February. You bill the client $3k per month from September through February.
- Cash: Each $3k is logged as revenue in the month you receive it. If the client is late on their September payment, which doesn’t come until October, then you log it in October.
- Accrual: Here’s where it can get tricky. The goal of accrual accounting is to show income in the period when it is earned, so if the $3k/month reflected an equal amount of work you did for the client every month, then you could log that income in the month you did the work, meaning $3k every month, regardless of when you actually received the money. If, on the other hand, the bulk of the work was in February when the event occurred, and the $3k/month was merely how you structured your payment schedule, then the full $18k would likely accrue in February.
Which Method is Best?
Although the cash accounting method is simpler and easier to implement, the accrual accounting method is likely a better measure of your business activity. It reflects exactly how much revenue you earned in a period of time, regardless of when clients paid you and when you paid vendors. It’s probably more logical when you say “My business did X in revenue last year” to have that equate to the amount of income you generated from all the events that took place last year.