Welcome to the world of managing your business's finances, where the choice between cash basis and accrual basis accounting is akin to selecting the right tool for the job. Here is a quick read about the difference between cash and accrual basis.
Cash Basis:
Imagine you own a small bakery. With cash basis, you record sales when customers hand you the cash and expenses when you settle bills.
An example of how sales are accounted for: In the bakery, if you sell a dozen cupcakes today and the customer pays, that income is logged immediately as being received today in your accounts.
An example of how purchases are accounted for: You pay the flour supplier for your bakery, cash basis logs the expense right away in your accounts.
Recap of Cash Basis:
Record income when received, and show the date of receipt in your accounts. For purchases, log the expense when incurred, regardless of payment status.
Accrual Basis:
Picture you've expanded to a thriving café. Accrual basis means you note down sales when you serve the coffee, not when the customer hands over the money. Expenses are recorded when you receive supplies, not necessarily when you pay the invoice.
An example of how sales are accounted for: As the café owner, if you cater an event in December but receive payment in January, accrual basis recognizes that income in December when the service was provided.
An example of how purchases are accounted for: For the café, if you order fresh produce on credit to be paid later, accrual basis recognizes that expense when you receive and use the supplies.
Recap of Accrual Basis:
Record sales when the service is provided and record purchases when goods are received, irrespective of payment timing.
So which one?
In the examples, for a small bakery owner, cash basis may be the go-to for its simplicity. As their business grows, the accrual basis could provide a more insightful perspective on your café's financial health.
Thank you for reading this 'A Practical Bookkeeper's Handbook' post. As your down-to-earth bookkeeper, my goal is to ensure your financial recipe is just right for the unique flavour of your business. I virtually support female-led sole proprietors, micro-corporations and partnership businesses in England and Wales. My goal is for my clients to gain confidence in their financial matters while optimising profits. If you are interested in working with me, you can contact me here.