Cash vs. Accrual: Thinking Differently

Bookkeeping, in its simplest form, is the same for all organizations: categorize the daily transactions, reconcile individual accounts, and produce reports such as the Income Statement & Balance Sheet. Individual entities can utilize all kinds of complexity about how transactions are categorized and tracked, but the TIMING of when the transactions are recorded falls into two systems: Cash & Accrual.

Cash Basis

• Transactions are recorded at the time the cash leaves the bank, regardless of when the business activity occurred that generated the activity.

• This is the simpler of the two options and essentially follows the activity listed on the bank & credit card statements. That makes the Income Statement a reasonable stand-in for the Statement of Cash Flows.

• The primary downside of cash basis accounting is that it does not consistently track the relationship between when revenue is earned and when it is collected.

Accrual Basis

• Transactions are recorded at the time the revenue is earned or the expense is consumed. So, if you completed a job in July but won’t be paid until August, the income will be reported in July, the month you earned the revenue. Similarly, the team’s payroll expenses required to complete the work are also assigned to July, even though they won’t receive their paychecks until August.

• Accrual basis is a bit more complicated but does a better job of “matching” revenues & expenses in the same month, which gives better insight into the operational efficiency for a given period of time.

When starting your business you must choose which accounting method you are going to use. Your CPA can help you determine which one is right for you. Lakesite Accounting is here to support the goals you set with all your professional resources. Schedule an Initial Consultation to learn more!