For any company launching its business performance, the choice of a financial reporting system predetermines the opportunities of monitoring and planning monetary capital. In accounting, there are two commonly used methods of reporting, including cash-based and accrual-based reporting. While both methods are used more or less equally by different companies, the choice of one limits some of the opportunities and provides some advantages (Reichard & Van Helden, 2016). A cash-based system is used to report expenses and income only when the company receives or pays money. On the contrary, an accrual-based system is used for accounting finances based on accounts receivable and payable, meaning that the company reports about the money it might not have in cash.
One might consider the following three factors that influence the selection of a particular accounting method, namely, company size, fixed assets, tax payments. Firstly, whether a company is large or small will define the size of the budget and the complexity of processes where the flow of finances is essential. While the small company might operate sufficiently using cash (choosing a cash-based system), large companies might require managing budget at a larger and more long-term scale (using an accrual-based system). Another important factor is fixed assets available to the company.
According to Reichard and Van Helden (2016), fixed-assets’ frequency and regularity are related to the accounting system. In particular, “if the purchase pattern of fixed assets is irregular over the years, … AB will show a much more stable pattern of resource consumption over the years than CB” (p. 51). Thus, when planning for fixed assets, a company should evaluate the anticipated regularity and choose an accounting method accordingly.
Finally, taxes also have a significant influence on the decision concerning the system of reporting. Indeed, under a cash-based system, a company is expected to pay taxes only for cash, while an accrual-based system necessitates paying taxes for all reported finances. Therefore, under the circumstances of limited monetary resources, a company might benefit more from a cash-based system. As for my opinion, I would choose a cash-based method of reporting when opening my company. It is easier to use, more transparent, and provides multiple opportunities for small businesses.
Reference
Reichard, C., & Van Helden, J. (2016). Why cash-based budgeting still prevails in an era of accrual-based reporting in the public sector. Accounting, Finance & Governance Review, 23(1-2), 43-65.