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