1. Size – a very small or new non-profit is more likely to have the resources and talent to use a cash accounting system. . This is when the income (cash or checks) is counted when received and expenses are counted when paid.
2. Staff or volunteer talent. Do you have volunteer or paid accountant? Or othe paid accounting staff. If your volunteer treasurer is not an account, again using a cash accounting system makes the most sense.
3. Available bookkeeping software – many packages are available for cash or accrual accounting methods
If you have a volunteer or paid accountant using an accrual system will help you to create a budget, using account codes, and make a profit and loss statement . In an accrual system, expenses are counted as they occur, even if the money is received later. For example, a grant letter from a foundation stating you will receive $25,000 is counted as of the letter date under an accrual system, but not counted under a cash system until the check is actually received.
The advantage of the cash accounting system is that you know where you stand at all times based on bank balances. Under the accrual system, you can have a zero bank balance but show income of $25,000 if the actual donation or grant has not yet arrived.
The accrual accounting system is much more common and is used by accountants, and auditors. If your organization uses accrual accounting be sure to have regular cash flow reports so that you get caught with a cash shortage.