gnucash volunteer items for benoit

Jon Lapham lapham at
Wed Sep 10 04:54:31 CDT 2003

Linas Vepstas wrote:
> -- "accrual v. cash" reporting.  explain what this is ...

Below is what I have for the business intro chapter.  This is derived 
from a thread a month (?) ago with Derek, and has yet to be committed to 
CVS.  I'll do that soon, but will require some chapter reorganization.

Original thread:

  <title>Accrual vs Cash Accounting</title>
   <para>There are two main methods of accounting, cash accounting and 
accrual accounting.</para>

   <para>In the <emphasis>cash accounting</emphasis> method, you enter 
income into the books when you actually receive payment, and you record 
expenses when you actually write a check.  Most personal finance is 
recorded using the cash method because it is simple to impliment, and 
fairly accurately represents most personal finance transactions. 
However, for business accounting this method suffers from some serious 
drawbacks.  Most notably, it is difficult to determine your real 
financial standing when you buy or sell items on credit, a very common 
business activity.</para>

<para>In the <emphasis>accrual accounting</emphasis> method, you enter 
income in the books when you make a sale, regardless of whether you have 
received payment or not. Inline with this, you record expenses when you 
receive goods or services, even if you will only pay for them at a later 

<para>The advantage of accrual accounting in a business setting is that 
it gives a more accurate picture of your finances within a financial 
period, even if payments will be arriving or leaving outside of this 
period of time.  The biggest disadvantage to the accrual method of 
accounting is that it is more complex, requiring entry of a sale or 
purchase twice.  Once at the time of the sale or purchase, and again at 
the time it is paid for.</para>

<para>The following is an example of a common problem with using the 
cash method of accounting in business. It is possible to artifically 
inflate apparent income in a period simply because many customers paid 
their bills from previous periods, but not due to increased sales.  This 
kind of accounting distorts the financial view of the company, which may 
lead to making incorrect business decisions. </para>

<para>The GnuCash business features (Customer Invoices, Vendor Bills, 
and Employee Expense Vouchers) implement an accrual-based system. 
Income and Expenses are accounted as they happen instead of as they are 
paid.  Indeed, there is no way to implement an A/R or A/P system without 
implementing it as an accrual system.</para>

<para>However all is not lost for companies that wish to continue to 
report on a cash basis.  They key is rather simple: ignore any income or 
expenses that have not been paid.  In other words, to compute the 
cash-basis income for the current period you have to add the income from 
invoices dated in previous periods but paid in this one and then 
subtract the income from invoices posted but not yet paid.  Similarly 
for expenses you need to add and subtract the bills paid in the 

<para>Unfortunately GnuCash does not (yet) automatically convert from 
its accrual-based business accounting to cash-based (see bug #95700). 
Creating cash-based reports are planned for a future release, but for 
now users must make the computation by hand.</para>

  Jon Lapham  <lapham at>          Rio de Janeiro, Brasil
  Work: Extracta Moléculas Naturais SA

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