Which method of accounting do you use: Cash or Accrual?
Most people who are not accountants say that they don’t understand the difference.
Accrual method includes both your Accounts Receivable and your Accounts Payable and therefore reflects the best feedback for how your business is doing because it includes what you’ve earned and what you owe.
Cash method only includes what you’ve actually collected and deposited and what you’ve paid out.
If you don’t have accounts receivable and you pay your vendors and your credit card balance in full the minute the bill comes in (yes.. some people have businesses like this!) then your cash basis is pretty much same as accrual for you. For most of the rest of us, accrual is more accurate.
Your cash balance is important.. in fact it’s crucial. If you don’t have enough cash to pay your bills and payroll, you’ll be using your savings, adding debt or jeopardizing your credit score until you do!
Spoiler alert! If you use the Cash method… have a big cash balance and a lot of unpaid bills and a credit card balance that hasn’t been recorded, you’re not seeing the true picture of how your business is doing. On the flip side if you bill your customers by using a Word document and don’t record them as Accounts Receivable invoices in your QuickBooks or accounting systems, you’re understating your net income.
You could be doing much better or much worse than you think you are!
Take the necessary steps to reveal the true picture of your company’s financial health. More about that in my next post.