Advantages and Disadvantages Of Cash- Basis Accounting

FEBRUARY 10, 2020 BY AVIAANA IN AUDIT

When you are running a business, in the UAE or anywhere else, it is important that the accounts are done in the most proficient way, using the best software application and by hiring the most skilled accountants or accounting firms in Dubai. However, one thing you need to decide-whether the cash basis accounting method will be used or you should opt for accrual basis accounting? Small businesses typically choose the former method.

In cash-based accounting, transactions are recorded only when the cash is either received or spent. It does not record product delivery or completion of service as a transaction. On an Accrual basis, delivery of services and products may be recorded as transactions even before actual cash is received. Payables get recorded even in absence of cash payment.

Choosing the Right method

You have to go through the UAE taxation norms before picking from any of the 2 accounting methods. In some cases, you may not use either cash or accrual method and a hybrid method may fit the bill. A tax consultant or agency can guide you on this. There are some businesses that still prefer the cash method. This has both advantages and drawbacks and it is important you get your facts clear on these.

Pros

• Easy to comprehend and handle- There is no denying that cash basis accounting is simple to understand and handle. For small businesses with the limited operation, this is actually the ideal method. You need not keep or hire a third party consultancy agency to handle such tasks.
• Cash flow- The method shows a cans flow like a statement. So, you can figure out the exact amount of cash your company has at any specific moment.
• Singular entry- It can be dealt with a simple, solo entry system. So you need not use a complex accounting program.

Cons

• The drawback of single entry- The single entry system may be advantageous for small entities but it can be erroneous for large-sized or growing companies. In the accrual method- double entry is necessary which offers better control.
• Short term picture- The cash basis method shows a cash flow but that can often be misleading! It does not show those earnings that have been invoiced but still not received. It also leaves out the upcoming expenses that have been invoiced but have not been deducted. It can be quite misleading too. For instance, in one month you may find the revenues are high. However, on the closer analysis, you may find the extra cash was paid by customers who cleared their due bills!

Summing it up

Which accounting method you will select for your UAE based venture, depends on a few factors. You have to think of the type and size of the business- to begin with. On average, small-sized companies with a limited number of employees can manage with cash basis accounting. However, for the mid to large-sized companies, that need to deal with several vendors and plenty of transactions – the accrual method is more prudent. In any case, your company can benefit from seeking help from professional accounting firms in Dubai.