Accounts

13 Pages 3170 Words

th the accrual method, you record income when the sale occurs, whether it is the delivery of a product or the rendering of a service on your part, regardless of when you get paid. You record an expense when you receive goods or services, even though you may not pay for them until later. The accrual method gives you a more accurate picture of your financial situation than the cash method. This is because you record income on the books when it is truly earned, and you record expenses when they are incurred. Income earned in one period is accurately matched against the expenses that correspond to that period, so you get a better picture of your net profits for each period.




CASH VS. ACCRUAL ACCOUNTING

All businesses need to choose one of these methods of accounting: cash or accrual.

It's important for you to understand the basics of the two principal methods of keeping track of a business's income and expenses: cash method and accrual method (sometimes called cash basis and accrual basis). In a nutshell, these methods differ only in the timing of when transactions both sales and purchases are credited or debited to your accounts. If you use the cash method, income is counted when cash (or a check) is actually received and expenses are counted when actually paid. But under the more common accrual method, transactions are counted when they happen regardless of when the money is actually received or paid.

So with the accrual method, income is counted when the sale occurs, and expenses are counted when you receive goods or services you don't have to wait until you see the money, or until you actually pay money out of your checking account. With some transactions, it's not so easy to know when the sale or purchase has occurred. The key date here is the job completion date. Not until you finish a service or deliver all the goods a contract calls for can do you put the income down in your books. If a job is mostly completed but...