Bookkeeping and accountancy provides businesses with an understanding of their current and future financial prospects. There are two primary ways of keeping track of expenditures and income, each of which gives a slightly different picture. Whichever method you chose to keep track of your finances, you should not forget its drawbacks. To get the most accurate possible picture, you may want to consider employing both. The cash method of recording is appropriate for small companies. By this method, no income or expenses are recorded until the cash itself changes hands. So even if you sold an expensive product, if the customer has not paid you yet, you do not write it down. If you order new supplies on credit, you do not write it down as an expense until you actually pay the bill.
Cash accounting is useful because it allows you to know how much money you have right now. It may not always reflect your financial situation accurately, though, because it doesn’t tell you how much money is still coming to you or how much you still owe. You could end up spending the same money twice over if you aren’t careful. The accrual method of accounting writes down expenses and income at the time they are earned or ordered. In other words, you would write down the price of that big sale immediately, though you haven’t been paid for it. You would also write down the cost of your new supplies as soon as you order them. Accrual accounting gives you a better overall picture of income and debts, but it doesn’t always reflect how much money you have on hand now and may make you think you’re flush with cash when you’re not. This method could place you at danger for bouncing checks or having to purchase on credit when you had planned to pay cash.
