Many small businesses, including veterinary practices, utilize cash basis accounting for their financial records. Cash accounting provides the benefits of simplicity, a real-time view of the business’s cash flow, and greater control over recorded income for tax purposes. However, accrual basis accounting offers a more accurate representation of a practice’s financial health, enabling better financial decision-making and practice management. Let’s talk about the primary differences between cash and accrual accounting—and why you should maintain an accrual basis for your books, even if you use a cash basis method for tax returns.

Cash Accounting

Businesses using the cash method of accounting recognize financial transactions at the point when cash is received from customers or paid out to third parties, not when the transactions actually take place. Cash basis accounting makes it easier to track the flow of money in and out of a business’s accounts, as it provides a real-time picture of available capital. Because accounts receivable and payable do not need to be tracked when using cash accounting, this method often requires less administrative work and is simpler for businesses to manage. Additionally, this method allows businesses to defer tax payments on income that has been billed to customers but not yet collected. Typically, only small businesses are permitted to use the cash basis method of accounting. While this method of accounting is simpler, it offers a less accurate view of a business’s financial health than accrual accounting.

Accrual Accounting

Unlike cash accounting, accrual accounting recognizes revenue at the point when it is earned and expenses at the time they are incurred. Accrual basis accounting ensures that income is matched with the time period in which goods or services were actually provided, and that expenses are recognized for the time period in which goods or services are received. In this way, accrual accounting provides a more accurate picture of a business’s financial health. While this method requires that cash flow be tracked separately and may not always provide the most accurate short-term depiction of available funds, accrual accounting provides more comprehensive insights for long-term financial planning and practice management.

Benefits of Using Accrual Accounting for Your Books

1. Provides a more accurate and comprehensive picture of your practice’s financial health and profitability.
2. Leads to a more accurate EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by matching revenues and expenses to the period in which they were earned and incurred.
3. Helps you compare and benchmark your profitability against other practices.
4. Guides decisions related to practice management, informing processes such as budgeting, forecasting, and cash flow management.

Learn More

RBT CPAs’ veterinary accounting experts can help you understand and implement an accrual accounting system in your practice, so you can achieve a clearer image of your practice’s financial situation and make more informed management decisions. And as always, our professionals are here to support all of your practice’s accounting, tax, audit, and advisory needs. Give us a call today and find out how we can be Remarkably Better Together.