Accrual / Cash Acct

[Buddha Buck]

On Fri, Jan 18, 2013 at 12:17 PM, Christopher Lam
<christopher.lck at gmail.com> wrote:
> I've been using Gnucash successfully for the past 2 years now, and
> I've always used the date as it appears from the bank statement to
> record my transactions. This means I usually wait a few days for the
> bank to release the statement onto onlinebanking to record the
> transactions. I understand this may be described as (modified) Cash
> Accounting.
>
> On the other hand, from my understanding of reading
> bookkeeping/accounting guides, they usually advocate using the Invoice
> Date or Date of Transacting (i.e. buying shares... buying a house...
> doing work for a client for later billing/payment processing), or, as
> is better known as, Accrual Accounting.

The difference between cash accounting and accrual accounting doesn't
have to do with when things are recorded going into and out of your
bank account, but more about recording things as happening when they
happen, regardless of how they affect your bank account.  Accrual
accounting recognizes that incurring expenses and paying the bills may
be separated in time; and that earning income and receiving payment
may be separated in time.

For instance, you could have a plumber come to your house on
12/28/2013 to fix a broken drain, and ask him to bill you.  Once he's
done the work, you've incurred the expense.  A week later, on
1/4/2014, you might send him a check to pay for it. Under cash
accounting, you would record the plumbing expense as on the 4th, as
that's when you paid the money.  Under accrual accounting, you would
record the plumbing expense on the 28th (when it happened), and the
payment, separately, on the 4th (when that happened).  Between the
28th and the 4th, you'd have a recorded liability to pay that bill.

One of the major effects of the difference is in reporting: in the
example I gave, under cash accounting, the plumbing fix would count as
a 2014 expense, but under accrual, it would be a 2013 expense.  This
may not be important to you, but it's crucial for some organizations
to keep track of that.