![]() Income is recorded when payment is received. You are not recording things like the depreciation of an asset that has a 5 year life. You are recording things like making a payment and receiving payments. In regards to something like a check, the transaction is recorded when the check is received and not when the funds become available.Ĭash accounting is much less abstract than accrual accounting because you are really just using common sense to figure out when to record a transaction. Cash accounting records transactions (revenue and expenses) when cash is either received or paid.Ĭash include physical cash or any form of payment, such as a check. In this blog, I will mainly describe accrual accounting.Ĭash accounting, oddly enough, is described in its name. Both types of accounting have their advantages and disadvantages, but accrual accounting gives the best representation of a company’s financial standing. Also, unimportant side note: I used to have a building where we used cash accounting and I was very unhappy when we sold it ‘cause cash accounting is soooo easy… but don’t cry for me yet, I ended up being happy when I split up the profits, so everything worked out okay in the end J.) The difference between cash and accrual accounting can be simplified as a difference in the point at which transactions are recorded in the books. (I’m not saying “farmers” as some type of insult, they really use it. The only people/companies that still use cash accounting are farmers and some real estate companies. Accrual Accounting – Ehhh, not really important to know the difference, just know which one you use.īasically, no one uses cash accounting anymore, but it is much easier. Some of the most important results of accounting are the financial statements, which I’ll explain later.Ĭash vs. The information is used to do everything from understanding the current status of the company to planning for the future and preparing taxes. The end result of Bookkeeping is to give us a bottom-line balance (or value) of each account.Īccounting is the next step, which is taking the account values and extracting information. It describes the action of recording all financial transactions. “Bookkeeping” and “Accounting” are used almost interchangeable, and there’s nothing so wrong about that.īookkeeping is the backbone of accounting. Some of these definitions are important, but not necessary to understand the rest of the accounting overview. If the latter, then you will still be confused about Debits and Credits, but, for now, just take them for what they are (don’t worry, I don’t even know what I mean with that sentence) and you’ll understand them in the Debits/Credits section. If you took the time to read this definition, you’re probably either bored or a novice at accounting. That’s the basic definition of Double-Entry Bookkeeping. If you think of Debits and Credits as positives and negatives, every transaction has to have a positive Debit and a negative Credit… but that’s crazy, never think of Debits and Credits as positives and negatives again! That’s how people get in trouble. (I’ll explain this clearly in the Debit/Credit section.)įor every Debit, there has to be an equal Credit. Examples:Īn expense account called, “Electricity.”Īn Income Account called, “Rental Income.”Īny transaction is always recorded using a minimum of 2 accounts, using at least 1 Debit and at least 1 Credit.ĭebiting or crediting an account means that you either decreased or increased that account. The transactions are recorded different accounts within books. We keep a set of books that we use to record these transactions. Here are the basics:įor any transaction that involves money, or even thinks about involving money, there is a record of this transaction. ![]() It dates back to around 1300ad, which is pointless information that I’m just putting in here for no reason. Alright, Double-Entry Bookkeeping is the standard that everyone in the world uses for accounting. ![]()
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