So What抯 Accrual Accounting and Why Does it Matter?

Posted by Pierre de la Fortune on August 21, 2015 @ 12:01 a.m.

Written by Tim Berry

So you make a sale. When you deliver the goods, you record it as a sale. If the customer didn抰 pay you immediately, you record the accrued amount as Accounts Receivable.

You order some goods. When you receive them, you don抰 pay for them. Instead, you record the accrued amount as Accounts Payable.

At the end of the tax year you have some expenses outstanding, like professional services you know you抣l be billed for but you haven抰 been billed yet. You accrue those expenses into the current tax year. They are deductible against income.

In so-called cash basis accounting, the opposite of accrual accounting, you don抰 put the sale or the purchase onto your books until the money changes hands. With business-to-business sales, the norm is the money changes hands later. So accrual accounting is better. It gives your books a more accurate picture of your financial flow and financial position.

Why does this matter here? Because timing of sales, costs, and expenses makes a difference. Start your forecasts correctly so the can be part of a more formal financial forecast when you finally need one.

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