You will also need to decide on either cash or what is known as “accrual” accounting. Cash accounting is accounting for transactions at the time payments are made or received. For many small organizations this will be perfectly adequate. However, because there is often a disconnect between when a transaction occurs and when payment is received or made, accrual accounting allows organizations to account for transactions when they are made, rather than when payment takes place.

The primary advantages of accrual accounting are, that it:

• Makes the relationship between revenue and expenses clearer
• Creates a more accurate picture of an organization’s assets and liabilities
• Makes audits possible
• Helps with budget preparation and long-term planning

The primary disadvantage of accrual accounting is that it can provide an inaccurate picture of cash on hand. Accrual accounting is required of larger organizations, who are expected to have their books audited annually by an outside firm.