Accrual or Cash basis Accounting ?

Accrual or Cash basis Accounting ?

How important is it to you and your business in getting an accurate monthly spread of sales and expenses ?

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Whether you use accrual or cash basis for your accounting normally depends on the extent of your sales and if you extend credit to your customers.

The most simple of the two is the cash method, any expenses are recorded when you actually pay for them and likewise sales are recorded when you receive the payment. This method is used by most sole traders but doesn’t suit a more complex business for example that might contain stock, be a Limited or Limited liability, partnership and have a turnover currently in excess of £166k.
The accrual method used for the majority of businesses records sales and costs/expenses as they occur and not when they are paid. A good example is credit as you may give your customers 30 days to pay your invoices your suppliers may give you the same, so the accrual method is based on recording the transaction when it happens irrespective of when it’s paid.

If you have supplier invoices coming in with charges that relate to periods in advance a typical example would be rent, insurance items etc that you have to pay up front then the Prepayment module available within our system is designed to save you time when processing these and let the system distribute the charges over the specified periods effortlessly. The amounts will then be reflected in your accounts in the months that they relate to and not when they don’t giving you a far more accurate picture of your financial reports on a monthly basis and save you time at the yearend if certain charges are split between accounting years.

The same process can be applied to your sales especially if you’re in the service industry. If, when raising a sales invoice you charge a quarterly or annual fee you may want to spread this revenue across the period concerned and not all into the month the sales invoice is dated. So you can defer your sales which can be reflected in your accounts giving you a better picture of your business.

If you would like to find out more about this module and make your life that little bit easier take a look at the links,

Prepayments

Deferring your sales