The IRS recognizes two methods of accounting: cash and accrual. As a rule, small businesses operate on cash basis and large ones on accrual. It is common for growing businesses to convert from cash to accrual as their annual revenues climb into the millions and most of them find an outsourced accounting department to be a necessity for this operation.

What Are the Advantages of Accrual Basis Accounting?

Cash accounting operates the way we run our personal finances. We put transactions in our books when they happen. We enter our paychecks when they get deposited, not when we work the hours. The rent check is logged when written, not necessarily on the first of the month. The problem with cash accounting is it doesn't provide an accurate financial picture.

In accrual accounting, financial transactions are entered into the books when they happen even if no money has changed hands yet. Invoices are logged when service is provided, not when a customer pays. Similarly, bookkeeping services enter expenses as they happen not when the check is written.

Including outstanding expenses and income creates an accurate profile of how the company is faring in real time. However it is a system which is harder for non-professionals to grasp and typically an outsourced accounting department is needed to administer an accrual system.

Who Should Use Accrual Basis?

In theory every business should use accrual basis. It is the professional accounting system most Generally Accepted Accounting Practices are built around. Realistically, the increased complication of the system and the added expense of hiring an outsourced accounting department makes less optimal for businesses below a certain size. Very small businesses can get by using a cash system, though an organization can never go wrong using accrual.

Per IRS regulations, any company generating over $10 million in annual revenue must use accrual. Businesses generating between $1 million and $10 million in revenue in the wholesale, retail, publishing, sound recording or mining industries must use accrual as well. Finally, partnerships, tax shelters and some farming corporations must use accrual regardless of revenue.

If you are unsure if your organization falls into these categories, an outsourced accounting department can help you make the determination.

Do You Need Professional Help?

Very few organizations can administer an accrual system without the benefit of an internal or outsourced accounting department. Some companies manage their own cash systems, but the complexities of accrual are beyond a typical bookkeeper.

Conversion to accrual should be part of an overall revision of a company's finances from the haphazard shoebox accounting small businesses might use to a professional financial system that grows with the company. However the system needs experienced and educated professionals to administer it properly.

An outsourced accounting department eases the transition to the new system and takes over the daily operations. The business owner can step back and take a big picture view of the operation, a necessary step as the company expands.