Not all businesses use the same accounting method. Some of them use the cash basis accounting, whereas others use the accrual basis accounting. There’s also the hybrid accounting method, which combines elements from both the cash basis and accrual basis accounting methods. If you’re thinking about using this alternative accounting method, you might be wondering how it works. Below is an introduction to the hybrid accounting method.
What Is the Hybrid Accounting Method?
The hybrid accounting method is an alternative bookkeeping process that features elements of the cash basis accounting method and the accrual accounting method. To better understand how it works, you must familiarize yourself with the two aforementioned accounting methods. The cash basis accounting method involves recording transactions when customers pay your business and when your business pays its customers. The cash accrual accounting method, on the other hand, involves recording money when your business earns it or pays it (e.g. sending or receiving an invoice).
Advantages of Using the Hybrid Accounting Method
There are several advantages of using the hybrid accounting method. It’s a better choice for predicting cash flow, for instance. With the hybrid accounting method, you’ll have the freedom to record transactions either at the time when money is exchanged or when your business it or pays it. Therefore, many businesses prefer the hybrid accounting method because it allows them to predict their future cash flow with greater accuracy. You can essentially change between the cash basis and the accrual accounting methods when using the hybrid accounting method.
Disadvantages of Using the Hybrid Accounting Method
Using the hybrid accounting method, on the other hand, can be somewhat difficult. The Internal Revenue Service (IRS) has specific requirements for this alternative accounting method. If you choose the hybrid accounting method for your business, for instance, you’ll have to create a separate set of records using the cash basis method. The IRS requires businesses to use the cash basis method if they plan on using the hybrid method.
Some businesses may discover that it’s difficult to keep track of transactions when using the hybrid accounting method. As previously mentioned, the hybrid accounting method allows you to record transactions using either the cash basis or accrual method. When switching between these two traditional accounting methods, you’ll have to remember which method you used and for which transactions.
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