Cash Vs. Accrual Accounting

Stephen Fishman, in Nolo.com, describes cash vs. accrual accounting this way:

The cash method and the accrual method (sometimes called cash basis and accrual basis) are the two principal methods of keeping track of a business's income and expenses. In most cases, you can choose which method to use. Learn how they work and the advantages and disadvantages of each so you can choose the better one for your business...Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction...Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.

Example:Your computer installation business finishes a job in November, and doesn't get paid until three months later in January. Under the cash method, you would record the payment in January. Under the accrual method, you would record the income in your November books.

Example: You purchase a new laser printer on credit in May and pay $1,000 for it in July, two months later. Using the cash method, you would record a $1,000 payment for the month of July, the month when the money is actually paid. Under the accrual method, you would record the $1,000 payment in May, when you take the laser printer and become obligated to pay for it.

Go to this site and read the entire article. There's a lot of good information.

Which one you choose is up to you. Me, I prefer to do my business planning on an accrual basis and report taxes on a cash basis. If you do your taxes on the accrual basis, you end of paying taxes on things you haven't actually benefited from yet.

They are measures of two different things. Cash accounting tells you your cash position. Accrual accounting measures the value of your business. You need to track value to see how you are growing or not. You need to track cash to know what you can spend.

The best way to choose between them is ask your account and your lawyer.

What do you think about this? Do you like accounting? Post a comment.

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