Why settle for cash-accounting when accrual-accounting is far superior ?

You probably guessed it from the title of this blog. I will definitely advocate that you adopt the accrual-based accounting versus the cash-based one?

But, first of all, a quick definition (you can complement my comments by visiting this link).

Cash accounting makes you record an accounting transaction only when you either pay or receive money. Simple, isn't? Yes, but this method has a major flaw (unless you run a corner shop where your business consists of cash sales and where you pay your suppliers also on COD - Cash On Delivery - basis).

Once you start to get into speed with Your business, you are going most probably to start negotiating payment terms with your suppliers as well as grant specific payment terms with your clients. In other words, when you will receive a supplier's invoice for goods or services rendered, such bill migh be payable at say 30 days from date of invoice. Now, how are you going to keep track of possibly dozens or thousands of outstanding bills payable !

This is where accrual accounting will become very handy to help you keep track of all these bills and have a true visibility and control over the true status of your business. It is clear that spreadsheet-based accounting will show its limit in such cases.

Thanks to a modern accounting software, you will enter these supplier or customer invoices as soon as you know about them. Similarly, the software will allow you to enter the payment terms associated with every one of these trading partners (as a shrewd business person, that's for sure that you will have negotiated appropriate payment terms to keep Your business afloat from a Cash viewpoint).

Such software will/ should highlight all bills payables and receivables as of a given date, thereby allowing you to get a much better grip on Your cash-flow.

If say, you run this software program giving you the status of both Your Accounts Receivables (AR) from your customers and Your Accounts Payables (AP) to your suppliers, you will be able to chase customers who do not respect credit terms and eventually to call your suppliers to tell them that you are a bit late, but assuring them that "the check is in the mail" !

If you wish to complement this reading with one of my previous blogs, you might visit Why Complicate accounting with double-entries?.

I will have more to say in a future blog about the "Accounting Matching Principle" and more complex, but equally important cases of using Accrual Accounting in Your day-to-day business.