So you make a sale. When you deliver the goods, you record it as a sale. If the customer didn’t pay you immediately, you record the accrued amount as Accounts Receivable.
You order some goods. When you receive them, you don’t pay for them. Instead, you record the accrued amount as Accounts Payable.
At the end of the tax year you have some expenses outstanding, like professional services you know you’ll be billed for but you haven’t been billed yet. You accrue those expenses into the current tax year. They are deductible against income.
In so-called cash basis accounting, the opposite of accrual accounting, you don’t put the sale or the purchase onto your books until the money changes hands. With business-to-business sales, the norm is the money changes hands later. So accrual accounting is better. It gives your books a more accurate picture of your financial flow and financial position.
Why does this matter here? Because timing of sales, costs, and expenses makes a difference. Start your forecasts correctly so the can be part of a more formal financial forecast when you finally need one.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
