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The Difference Between Accrual

Small business owners are often asked byyears of business. If your business falls
bankers, investors, and other interestedinto this category, you must use the accrual
parties about which method of accounting theymethod  of  accounting.
are using to produce their company's
financial statements. The person reviewingThe accrual method of accounting is the
your financial data needs to know this so"correct" way to compile your financial
they can accurately review the numbersstatements. If you hire a CPA to compile your
presented them. Both the accrual and cashfinancial statements, they will produce your
methods are accepted ways of recordingfinancial statements in accordance with
transactions, but each method sometimes gives"GAAP" (Generally Accepted Accounting
very different results in your bottom linePrinciples). This simply means that they will
profit.use the accrual method of accounting. What
does accrual mean? The timing of your
The cash method of accounting is the mostbusiness revenue and expenses are better
commonly used method. It is the easiest waymatched with this method. You record the sale
to record transactions and can normally beof goods and services when they are invoiced
done by the business owner and not anor the job is complete. It does not matter if
accountant. Simply put, the cash methodyou have collected the money yet or not.
records money when it comes in, and moneyExpenses are also recorded in the company
when it goes out. It is basically a mirrorbooks when they are "incurred" or due and
image of your business account checkpayable. They are not necessarily recorded
register. For example, when a customer payswhen they are paid. This type of accounting
you money for goods and services, you thenwill give you a better picture of how your
record the sale in your books. When you writebusiness is actually performing and should be
a check or pay cash for an expense that isused  when  analyzing  your business profits.
the moment in time when you enter the expense
in your books. It's as simple as that. MostNeither method of accounting is wrong or
all small businesses can use the cash methodright. It is up to the business owner or his
of accounting if they wish, unless they carryaccountant to determine which method will be
inventory and average over ten millionused.
dollars in gross sales in the three prior



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