Do you know if your business is Accrual or Cash?  My tax guy says it is Cash, but my accountant says Accrual.  Confusing?  Does it make it difference?  I think it is a cash business…

Accrual vs. Cash Basis Accounting

This is a typical conversation I have with Contractors with small businesses.  The answer is YES it makes a difference.  Most sophisticated businesses consider themselves Accrual basis businesses for book purposes.  You may say what is book purposes?  Depending on what phase your business at some point you will be required to produce financial statements.  You may have heard there is internally produced, compiled, reviewed, and audited financial statements. The book purpose follows the matching principle of GAAP (generally accepted accounting principles).  Where the revenues match the period in which they were earned or recognized, and the expenses match the period incurred. 

What does all this accounting lingo mean to me?  Okay I know, boring.   Here is what you need to know.  When I receive a subcontractor pay application is this Cash, the answer is “No”.  It is Accrual.  Keep it simple.  When you receive or deposit a check it is Cash.  Or, when you cut a check it is Cash.  On the other hand, when you record an owner billing it is Accrual or receive a subcontractor pay application it is Accrual.

I know this is getting way to long and too much detail.  Just remember most sophisticated businesses are on Accrual basis accounting for book purposes and Cash basis for taxes.  Here is a quick example below for all you engineer types that need to see the numbers for this to compute: