Cash or Accrual

1. Identify five local businesses and talk to their owners. Ask them about how they handle their accounting needs. Do they do it allthemselves or do they use an accountant or an accounting service? If they use an accountant or an accounting service, ask them in what way—merely to prepare taxes or do they draw on them for other advice?

2. Identify five local accountants or accounting firms. Ask them about the services that they provide to small businesses. If possible, try to determine the cost of these services.

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3. Ask the five local businesses which system they use—cash or accrual—and why they use it.

• Cash basis systems count a transaction when the cash is received. Such systems are used by smaller businesses that have no appreciable inventory.

• Accrual basis systems count transactions when they occur. Although this system may require additional analysis to determine a business’s actual cash position, it provides a more accurate measure of profitability.

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