Cash Basis vs. Accrual-Based Accounting: Choosing the Right Method for Your Small Business

January 15, 2023

As a small business owner, choosing the suitable accounting method to track and manage your financial data is essential. But with so many options available, it can take time to know which method is best for your business. In this article, we'll explore two of the most commonly used accounting methods: cash basis accounting and accrual-based accounting. By understanding the differences between these two methods, you can decide which is right for your business.


What is the Difference Between Cash Basis Accounting and Accrual-Based Accounting?

A view of a financial statement through a magnifying glass - cash basis vs. accrual-based accounting concept.

At a high level, the main difference between cash basis accounting and accrual-based accounting is the timing of when transactions are recorded. With cash basis accounting, it records transactions during the exchange of cash. For example, if you sell a product or service and receive payment from a customer, it records the sale at that time. On the other hand, accrual-based accounting records transactions when they occur, regardless of the time of payment. So, if you sell a product or service on credit, the sale is recorded at the time of the sale, even if payment is not received until later.


Advantages of Cash Basis Accounting


One of the main advantages of cash basis accounting is that it simplifies record-keeping. Since transactions are only recorded when cash is exchanged, there are fewer transactions to track and record. This can make it easier for small business owners with limited accounting knowledge or capacity, to understand and manage their financial data.


In addition to being easier to understand, cash basis accounting can also be less expensive to implement. Since it requires fewer transactions to track and record, it may require fewer resources and less time to maintain.


Disadvantages of Cash Basis Accounting


While cash basis accounting has advantages, it also has some significant drawbacks. One of the main disadvantages is that it can be less accurate in reflecting the actual financial status of the business. Since it only records transactions during the exchange of cash, it may provide a partial picture of the business's financial activities.


Another disadvantage of cash basis accounting is that it does not provide a clear picture of future cash flow. Cash basis accounting only records transactions during the exchange of cash. Hence, it may not accurately reflect the business's future financial obligations or opportunities.

Finally, cash basis accounting may not be suitable for businesses with high levels of credit sales. Since transactions are only recorded when cash is exchanged, credit sales may only be reflected in the business's financial records once payment is received.


Advantages of Accrual-Based Accounting


Accrual-based accounting provides a more accurate picture of the business's financial status. Since it only records transactions when they occur, regardless of the receipt of the payment, accrual-based accounting offers a complete picture of the business's financial activities. This can be especially important for businesses with high levels of credit sales. It allows them to track and manage their accounts receivable accurately.


In addition to being more accurate, accrual-based accounting can also provide a clearer picture of future cash flow. It can help businesses better predict their future financial obligations and opportunities by recording transactions when they occur.


Another advantage of accrual-based accounting is that it can be more suitable for businesses with high levels of credit sales. Since it records the credit sales at the time of the sale rather than when receiving payment, businesses can better manage their accounts receivable and predict future cash flow.


Disadvantages of Accrual-Based Accounting


While accrual-based accounting has its advantages, it also has some significant drawbacks. One of the main disadvantages is that it can be more complex to implement and understand. Since it records transactions when they occur, regardless of the time of the payment, it can require more detailed record-keeping and a deeper understanding of accounting principles.


Another disadvantage of accrual-based accounting is that it may require more resources and time to maintain. Since it involves tracking and recording more transactions, it may require more effort to manage accurately.


Finally, accrual-based accounting can be more expensive to implement, especially for small businesses that may not have the resources or expertise to manage it effectively.


Conclusion


In conclusion, choosing the right accounting method for your small business is essential. So, which one do you use for your business? Both cash-based and accrual-based accounting have advantages and disadvantages. The right method for your business will depend on your specific needs and goals. 


If you're still unsure which method suits you, consider reaching out to us for a free consultation. We will help you understand each method's pros and cons and make an informed decision about which is best for your business.

How to Estimate Taxes When You’re Self-Employed: A Simple Guide

By Patricia Moore • April 23, 2025
Working for yourself is exciting—you're your own boss, setting your own schedule, and building something you're proud of. But when it comes to taxes, things can get a little tricky. Unlike traditional employees who have taxes withheld from their paychecks, self-employed individuals are responsible for managing and paying their own taxes throughout the year. That’s where estimated taxes come in. They help you avoid a surprise tax bill (or penalties) when tax season rolls around, and they’re a big part of staying compliant and financially healthy as a business owner.  Let’s break down how estimated taxes work and what you need to do to stay on top of them. What Are Estimated Taxes? Estimated taxes are payments you make to the IRS throughout the year on income that isn’t subject to withholding. This includes money you earn from freelancing, gig work, contract jobs, or running your own business. If you expect to owe at least $1,000 in taxes for the year after subtracting withholding and tax credits, you’ll likely need to make estimated payments. These payments cover both your income tax and self-employment tax (which includes Social Security and Medicare). When Are Estimated Taxes Due? Estimated tax payments are made four times a year: - April 15 – for income earned January 1 to March 31 - June 15 – for income earned April 1 to May 31 - September 15 – for income earned June 1 to August 31 - January 15 (of the following year) – for income earned September 1 to December 31 If the due date falls on a weekend or holiday, your payment is due the next business day. How Much Should You Pay? There are a couple of ways to figure this out: - Safe Harbor Method: If your income is similar to last year’s, you can avoid penalties by paying at least 100% of last year’s tax liability (or 110% if your adjusted gross income was over $150,000). - Current-Year Estimate: If you expect to earn more or less than last year, aim to pay at least 90% of what you’ll owe this year. You can use IRS Form 1040-ES and your prior year’s return to help calculate your estimated payments. How to Make Payments You have a few options when it comes to sending in estimated tax payments: - IRS DirectPay – an easy way to pay online - IRS2Go mobile app – convenient for on-the-go payments - Mail a check – using Form 1040-ES - IRS online account – track payments, balances, and access past tax records No matter how you pay, be sure to mark your calendar and avoid missing a deadline. What If You Don’t Pay Enough? If you underpay or make late payments, the IRS may charge you a penalty. For 2025, the interest rate for underpayment is 7% plus 3 percentage points, and the interest is compounded daily, which can add up quickly. You can usually avoid this penalty if: - You owe less than $1,000 when you file, or - You paid at least 90% of your current year’s tax bill, or - You paid 100% of your prior year’s tax (or 110% if your income was higher) Reassess When Life Changes Life happens—maybe you got married, took on a second job, or had a child. Any of these events can change how much tax you owe. Check in on your income and expenses every few months and adjust your estimated payments if needed. If you also earn W-2 income, consider increasing your withholding through your employer by submitting an updated Form W-4. This can help offset your self-employment tax and reduce what you need to pay quarterly. Why Hiring a Bookkeeper Can Make a Big Difference Being self-employed means wearing a lot of hats—and tax planning doesn't have to be one of them. A professional bookkeeper can help you stay organized, track your income and expenses, and make sure your estimated payments are accurate and timely. At Keep-On-Booking, I work with self-employed individuals and small business owners to take the guesswork out of tax season. From ongoing bookkeeping to estimated tax support and financial reporting, I'm here to help you stay on top of your finances—so you can focus on doing what you love.
Schedule a consultation today and let’s make your next tax season the easiest one yet!

Top 10 Commonly Missed Tax Deductions for Self-Employed People

By Patricia Moore • January 28, 2025
Tax season can be a challenge for self-employed individuals, but it’s also an opportunity to save money by leveraging deductions. Unfortunately, many people overlook key expenses that could significantly reduce their tax bill. Here’s a quick guide to the top 10 commonly missed tax deductions: Retirement Plan Contributions: Contributions to SEP-IRAs, SIMPLE IRAs, and solo 401(k)s are tax-deductible. Tax-deferred growth helps you build a stronger financial future while reducing your current taxable income. Self-Employment Tax: You pay the full 15.3% Social Security and Medicare tax as a self-employed person. Deducting half of this tax aligns your tax burden closer to that of traditional employees. Home Office Expenses: Deduct a portion of your rent, mortgage, utilities, and insurance if you use a part of your home exclusively for business. Use the simplified method to calculate your deduction or opt for actual expenses if they’re higher. Health Insurance Premiums: Deduct premiums for health, dental, and long-term care insurance for yourself, your spouse, and dependents under 27. This deduction applies even if you don’t itemize your deductions on your tax return. Internet and Phone Bills: Deduct the business portion of your phone and internet expenses. Ensure you separate personal and business use to avoid IRS scrutiny. Meals: Deduct 50% of meals for business purposes, such as client meetings, conferences, or travel. Meals must be reasonable and not considered extravagant to qualify as deductible. Office Supplies: Items like pens, paper, printer ink, and other business essentials are fully deductible. Don’t forget to deduct larger office equipment like desks, chairs, or computers if used solely for business. Marketing and Advertising: Deduct the full cost of promoting your business, such as website hosting, social media ads, and printed materials. Costs related to branding, like logo design or promotional items, are also deductible. Professional Services: Costs for accountants, lawyers, consultants, or other professional services are fully deductible. Fees for tax preparation software or financial advisors can also qualify as deductions. Travel Expenses: Deduct costs like airfare, lodging, car rentals, and meals for business-related travel. Parking fees, tolls, and transportation to and from meetings or the airport can also be deducted.  Why You Should Hire a Bookkeeper: Keeping track of expenses and deductions can be overwhelming. Hiring a bookkeeper provides: Maximized Deductions: Ensures you claim every eligible expense Time Savings: Lets you focus on running your business while they handle the details. Accuracy: Reduces errors and the risk of audits. Financial Insights: Helps you better understand and plan your finances. Bonus Tip: The cost of hiring a bookkeeper is a deductible business expense! . Final Thoughts Navigating taxes as a self-employed individual doesn’t have to be stressful or overwhelming. By staying informed about commonly missed deductions and maintaining accurate records, you can significantly reduce your tax burden and keep more of your hard-earned money. At Keep-On-Booking, I help take the guesswork out of your finances. From payroll management to tax filing and financial reporting, my services are designed to save you time and money while you focus on growing your business. Contact me today for a consultation: https://www.keep-on-booking.com/consultation

Understanding Worker Classification: A Guide for Colorado Business Owners

By Patricia Moore • October 2, 2024
As a Colorado business owner, one of the most important decisions you’ll make is how to classify the people who work for you. Are they employees or independent contractors? Properly classifying your workers in line with Colorado's laws is crucial, as it affects everything from wages and benefits to tax responsibilities. This blog will walk you through the key differences between employees and independent contractors in Colorado, the protections each group is entitled to, and the consequences of misclassification. Whether you’re starting a new venture or managing an established business, getting worker classification right is essential for staying compliant and protecting your business. Employees: Wages and Hours: Colorado employees are entitled to at least the state minimum wage, which adjusts annually. They are also covered by the Fair Labor Standards Act (FLSA), which requires overtime pay at 1.5 times the regular rate for any hours worked over 40 in a week. Benefits and Protections: Employees have access to a range of benefits such as unemployment insurance, workers’ compensation, and health benefits. Additionally, they are protected from workplace discrimination, unsafe working conditions, and wage theft under both federal and state law. Legal Recourse: If their rights are violated, employees can file complaints with the Colorado Division of Labor Standards and Statistics. These violations could include unpaid wages, workplace safety issues, or employment discrimination. Independent Contractors: Flexibility: Independent contractors in Colorado typically enjoy more freedom in choosing their working hours and methods for completing tasks, allowing for greater flexibility in their work-life balance. Limited Protections: Unlike employees, independent contractors aren’t entitled to minimum wage, overtime pay, or benefits such as unemployment insurance and workers' compensation. They also aren’t covered under most employment discrimination laws. Tax Responsibilities: Independent contractors must manage their own taxes, including self-employment tax, and are responsible for covering their own benefits, insurance, and retirement savings. The Importance of Proper Classification In Colorado, workers are generally presumed to be employees unless proven otherwise. If an employer wants to classify someone as an independent contractor, they must demonstrate that the worker is: Free from the employer’s direction and control in performing their work; and Engaged in an independent business or profession related to the work they perform for the employer. Employers cannot rely solely on issuing a 1099 form to classify someone as a contractor. A written contract is required, outlining key elements like the contractor's obligation to handle their own taxes and the fact that they won’t receive unemployment insurance unless they or another entity provide coverage. Key Factors to Determine Worker Classification Colorado uses a variety of factors to assess whether a worker is an employee or an independent contractor. These factors include: Control Over Work: If the employer dictates how, when, and where the work is done, the worker is more likely an employee. Nature of the Work: If the worker performs tasks integral to the employer’s core business, they are probably an employee. Payment Method: Employees are generally paid by the hour or on a salary, while independent contractors are paid per project or job. Tools and Equipment: Employees often use tools and equipment provided by the employer, whereas independent contractors provide their own. Consequences of Misclassification Misclassifying an employee as an independent contractor to avoid paying overtime, unemployment taxes, and other benefits can lead to serious penalties. Businesses found in violation could face: Back pay for unpaid wages and overtime Fines and penalties Back taxes for unemployment insurance and other withheld benefits Proper classification of workers is essential to avoid legal and financial repercussions. Colorado’s Division of Labor Standards and Statistics can investigate claims of misclassification, and violations can be made public under the state’s Wage Theft Transparency Act. Get Professional Help For small business owners, navigating these complex classifications and ensuring compliance can be overwhelming. By hiring professional bookkeeping services, you can ensure accurate worker classification, maintain compliance with employment laws, and avoid costly penalties. Keep-On-Booking's expertise in payroll management, tax filing, and financial reporting allows you to focus on growing your business with confidence and peace of mind. Contact us today to learn more: https://www.keep-on-booking.com/consultation