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Accounting for Multiple Revenue Streams: How to Balance Different Accounting Methods

by
Grayson Kemper
on
1/13/2020
Accounting for Multiple Revenue Streams: How to Balance Different Accounting Methods

The two core accounting methods – cash and accrual basis – each offer distinct advantages to certain types of businesses.

Cash accounting only recognizes revenue and expenses when money is exchanged. 

By contrast, accrual accounting recognizes revenue when earned and expenses when they’re billed (rather than paid).

It’s important to consider which accounting method can best promote the financial health and growth of your company.

Many businesses use a hybrid accounting system, balancing the cash and accrual methods to both gain clarity and execute with current, granular data.

Use this article to determine which accounting system suits your business and, if necessary, how to balance these different accounting methods.

1. Cash vs. Accrual – Which Accounting System Fits Your Business?

The primary difference between cash and accrual accounting is when sales and purchases are recorded.

The cash basis is used for financial transactions such as payroll, investments, or asset purchases and only records income and expenses when money changes hands, making it a simple way to view your company's cash position.

Cash accounting is the preferred method for small businesses with limited time, accounting expertise, or funds for outside assistance.

The shortcoming of cash accounting is that – though it accurately reflects cash flow – it is not an accurate record of a business’s financial performance from month to month.

Accrual accounting can provide this financial clarity.

Accrual accounting uses accounts payable and accounts receivable to track income when earned and expenses when billed, instead of paid.

These accounts are adjusted upon payment to reflect a business’s financial performance over time. This allows you to budget, forecast, and make business decisions based on the most accurate data.

But while accrual accounting can track performance, it doesn’t accurately represent cash flow.

For example, a company with zero money in the bank can appear profitable by only using accrual accounting.

2. Use Hybrid Accounting When Accuracy Is Critical

Using both cash and accrual basis accounting allows you to track income, assets, liabilities, and expenditures up to the minute.

This hybrid accounting method enables you to make the most well-informed business decisions: by integrating the two accounting methods, a business can gain both a micro and macro sense of their finances.

Say your business has $15,000 in cash and $30,000 in accruals at the end of the quarter.

Under the hybrid method, looking at accruals from last quarter and last year can help you forecast demand for the coming business cycle. Meanwhile, visibility of your cash position helps you ensure that these decisions are both smart and solvent.

This is especially important for companies that conduct numerous transactions or have large inventories and need to manage cost-per-unit in order to stay profitable.

A hybrid approach also helps businesses in transition – for example, moving office spaces, extensive hiring, or restructuring.

First, your business needs performance data from the accrual method to apply for loans, generate investor reports, or file with the IRS after a complex tax-year. To effectively leverage capital, tell investors what a report means, or ensure tax compliance, though, the cash method is required.

The hybrid accounting method offers visibility of costs and income, as well as the long-term performance data needed to forecast and make optimal business decisions.

3. Balance Accounts Before Adopting Accrual Basis

Companies that shift into the hybrid accounting method need to balance their revenue streams.

To incorporate accruals into cash accounting, you’ll need to adjust your records to reflect incurred income and expenses.

The steps to effectively accomplish this include:

  • Combine accrued and prepaid expenses: For example, a plane ticket purchased in October for a flight in December must be moved to December when the expense gets used.
  • Add accounts receivable: To track the money that’s owed to your business, add unpaid client invoices to your records on the date billed.
  • Subtract unearned revenue: This accounts for the money you’ve received for work yet to be done. If you bill $200 in April for work that gets done in May and June, record the sum as $100 over each month.

Hiring an accounting professional can help businesses to navigate the complex act of balancing their finances.

Using Both Cash and Accrual Accounting Methods

Larger businesses often use accrual accounting for its precision, and small businesses tend to use cash accounting for its simplicity.

Combining these two methods allows you to monitor cash flow, anticipate future income and expenses, and make well-informed business decisions.

Grayson Kemper is a Content & Editorial Manager for Clutch and guest author for CountingWorks.

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Grayson Kemper

Grayson Kemper

Grayson Kemper is a Content & Editorial Manager for Clutch, the leading research, ratings, and reviews platform for B2B services and technology solutions providers.

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