Don’t count your chickens before they hatch – unless you do accrual accounting, so the saying goes. Wait, what, you say you haven’t heard that one?
Well, I don’t know exactly where that saying comes from, but I can say it has a lot to do with the big question here… just what is accrual accounting?
Accrual accounting is simply a method to match revenue and expenses to the time in which they are earned or spent via a logical and structured system.
Ok, what the heck does that mean? It means, sometimes it is okay to count your chickens before they hatch.
In business, it is reasonable to assume that if you send out an invoice, you will get paid. That’s kind of the point. Think of those invoices as eggs and the cash that comes back from them as chickens.
So, you might ask? It’s cash that is king of the roost. That may be so, but imagine the scenario where your business sends out all the invoices on the first of the month. Peek in the henhouse on day two and it looks like you have nothing: no eggs and no cash – just a bunch of hungry chickens.
With accrual accounting you can count the invoice as income. With cash accounting, you have to wait until you actually receive the cash.
But what about those hungry chickens that got introduced? Don’t worry, accrual accounting is thinking of them as well. You go to the feed store and use your credit card and buy some food. That too is accrual accounting. It is a liability on your end and an asset on the bank’s books. With the result being a bunch of happy chickens. And that’s good for everybody, right? Exactly!
If your business is like an egg that needs a warm safe place to grow, reach out to Johnston Accountancy and talk with us to see if cash or accrual accounting is right for you.