You might have heard or read about “accrual” or “cash” based accounting, but what does it mean to a handmade seller?
Let’s go through the basics so you can be more confident choosing the best method to use for your business.
Accrual vs Cash Based Accounting for your Sales
The main difference between accrual and cash is the way that you recognise when revenue is received and when expenses are paid out. This is a another way of saying when the amount you get from sales, or the amount you pay for the materials you purchase are officially recorded in your bookkeeping system of choice.
For the cash method of accounting, a sale is only added as revenue when payment is received for it.
The accrual method of accounting instead counts the revenue when the order is first received, regardless of any payments made.
E.g I sell a silver bracelet for $50 on March 14 and invoice the customer on the same day. I however only receive payment for the bracelet on the 18 April.
Under the cash method of accounting, $50 would appear as revenue on the 18th April.
Under the accrual method, $50 would appear as revenue on the 14th March.
Accrual vs Cash for your expenses
For the cash method of accounting, a bill is only added as an expense when payment is made for it.
The accrual method of accounting will counts the outgoing money when the bill is first received, regardless of any payments made.
E.g I purchase some office supplies for $100 on March 14 and pay for the supplies on 18 April after delivery.
Under the accrual method of accounting, $100 would appear as an expense on the 14th March.
Under the cash method, $100 would appear as an expense on the 18th April.