Why do you think some smaller businesses do not carry receivables? What difference would this make in their decision to use cash basis or accrual accounting?
Some smaller businesses may choose not to carry receivables for several reasons. One possibility is that they operate in industries where customers typically pay immediately or in advance for goods or services. Examples include retail businesses, restaurants, or small service providers where payment is made at the time of purchase or service delivery.
Another reason could be related to the nature of their business operations. Some businesses may have a short billing cycle where they can quickly convert their sales into cash. For instance, businesses that operate on a cash-on-delivery (COD) basis or online businesses that receive immediate payment through credit card transactions may not have a need for carrying receivables.
The decision whether to use cash basis or accrual accounting is often influenced by the presence or absence of receivables.
If a business does not carry receivables, meaning it receives immediate payment for all its sales, it can simplify its accounting processes by using the cash basis. Cash basis accounting recognizes revenues and expenses when cash is received or paid out, respectively. This method is straightforward and provides a clear picture of the actual cash flow in the business.
On the other hand, if a business does carry receivables, it may choose to use accrual accounting instead. Accrual accounting recognizes revenues when they are earned, regardless of when the cash is received. It matches revenues and expenses to the period in which they are incurred, providing a more accurate depiction of the business's financial performance. This method is often preferred when significant receivables exist, as it helps track sales and expenses more comprehensively.
In summary, the decision to carry receivables or not can impact a business's choice between cash basis or accrual accounting. If a business operates without receivables, cash basis accounting can be simpler and more suitable. However, if receivables are present, accrual accounting provides a better representation of the business's financial situation.