Experiences from an Entrepreneur

Before you being keeping “the books”, There’s a few things that you need to understand. I promise it’s not that difficult.

Here’s the first lesson.

There are two different methods of accounting for a company’s transactions: Cash and Accrual. You might have heard them referred to as Cash Basis or Accrual Basis. The only difference in these two methods is in the timing in which the transaction is recognized on the accounting books.

Here are two examples to help illustrate: (I told you I would make this easy)

You are an electrician. You visit an office and install new lights in November. You leave an invoice for $500 to be paid in 30 days. The check arrives at your office in December and you make the deposit. If you are using a Cash Basis accounting method, you would recognize the $500 revenue in December, when you received the “Cash”. If you are using an Accrual Basis accounting method, you would recognize the $500 revenue in November when you performed the service.

Example 2 (the other side of the story)

You are an office manager. You receive a visit from an electrician who installs new lights in November. He leaves you an invoice for $500 to be paid in 30 days. You cut the check and put it in the mail in December. If you are using a Cash Basis accounting method, you would recognize the $500 expense in December, when you made the “Cash” payment. If you are using an Accrual Basis accounting method, you would recognize the $500 expense in November when you received the service.

Most small businesses use the cash basis accounting method. This is an easier method for companies that don’t have a lot of accounts or transactions.

Make sure you visit with a CPA or tax professional to determine which method to use when you are setting up your business…or you can just take my word for it and use the Cash method until you get big enough that it makes a difference.