| The Difference Between Accrual & Cash | | | | inventory and average over ten million dollars in |
| Accounting | | | | gross sales in the three prior years of business. If |
| By Kimberly Bagley | | | | your business falls into this category, you must |
| Small business owners are often asked by | | | | use the accrual method of accounting. |
| bankers, investors, and other interested parties | | | | The accrual method of accounting is the "correct" |
| about which method of accounting they are using | | | | way to compile your financial statements. If you |
| to produce their company's financial statements. | | | | hire a CPA to compile your financial statements, |
| The person reviewing your financial data needs to | | | | they will produce your financial statements in |
| know this so they can accurately review the | | | | accordance with "GAAP" (Generally Accepted |
| numbers presented them. Both the accrual and | | | | Accounting Principles). This simply means that |
| cash methods are accepted ways of recording | | | | they will use the accrual method of accounting. |
| transactions, but each method sometimes gives | | | | What does accrual mean? The timing of your |
| very different results in your bottom line profit. | | | | business revenue and expenses are better |
| The cash method of accounting is the most | | | | matched with this method. You record the sale of |
| commonly used method. It is the easiest way to | | | | goods and services when they are invoiced or the |
| record transactions and can normally be done by | | | | job is complete. It does not matter if you have |
| the business owner and not an accountant. Simply | | | | collected the money yet or not. Expenses are |
| put, the cash method records money when it | | | | also recorded in the company books when they |
| comes in, and money when it goes out. It is | | | | are "incurred" or due and payable. They are not |
| basically a mirror image of your business account | | | | necessarily recorded when they are paid. This |
| check register. For example, when a customer | | | | type of accounting will give you a better picture |
| pays you money for goods and services, you | | | | of how your business is actually performing and |
| then record the sale in your books. When you | | | | should be used when analyzing your business |
| write a check or pay cash for an expense that is | | | | profits. |
| the moment in time when you enter the expense | | | | Neither method of accounting is wrong or right. It |
| in your books. It's as simple as that. Most all small | | | | is up to the business owner or his accountant to |
| businesses can use the cash method of | | | | determine which method will be used. |
| accounting if they wish, unless they carry | | | | |