Automating Financial Operations
1/24/22
Eliana Drescher

The Difference between Cash Accounting and Accrual Accounting, and the terms you need to know:

The kind of clean compliance, swift productivity, efficient costs and accurate data delivery that top tier companies expect to unlock massive growth used to only be possible by hiring teams of dozens of bookkeepers and accountants - making starting and scaling a new company successfully incredibly risky and challenging. 

What is “Cash Basis Accounting” 

Cash accounting is the simple accounting method where revenues and expenses are recorded in the period in which they are received and paid. Cash accounting makes it very difficult to see how your business is performing because you are unable to line up expenses and revenues to the correct time period. Any business with complexity should move past cash accounting to accrual accounting.

What is “Accrual Basis Accounting”?

For more complex businesses, accrual accounting is key. Accrual accounting is the only accounting method that allows you to see how you are performing by lining up expenses and revenue to the period in which the work was performed or the goods where sold (instead of when the cash changed hands).

All about Bookkeeping

Bookkeeping is the method of recording transactions to their proper accounts on the general ledger, so that they are posted correctly in a business accounting file. Bookkeeping and accounting are NOT the same thing, and bookkeeping is handled by a bookkeeper, while accounting is handled by a CPA - described below. 

What does CPA stand for?

A CPA is a Certified Public Accountant.  This abbreviation means that someone has passed rigorous testing to become a trained and certified accountant. 

What does GAAP mean? 

GAAP, or generally accepted accounting principles, are a set of rules and guidelines that dictate how businesses need to handle accounting. The United States, among a few other countries, follows GAAP. Most countries follow IFRS or the International Financial Reporting Standards.

What is a “Trial Balance?”

When an accounting “closes the books” they will create a trial balance as a means to check their work. It helps them make sure that all debits equal all credits. This will likely catch any mistakes made, and will allow the accounting to remedy those mistakes by adjusting journal entries. 

What is a “Journal entry”

Journal entries are made for every transaction in the general ledger and corresponding accounts. They each have two components: debit and credit. 

What is a “Debit”?

 When an amount in an account increases, it’s called a “debit”. 

What is a “Credit”? 

When an amount in an account decreases, we call that a “credit”. 

What is “Unearned Revenue”?

Unearned revenue is money that your business has received, even though you haven’t done the work for it yet. When customers pay you in advance for work, that revenue is still “unearned” and is shown as a liability until the work is performed. 

What is a “Fixed Cost”?

There are two types of costs: fixed and variable. A fixed cost is a cost that does not change regardless of how many sales your business generates. This includes things like salaries or rent. 

What is a “Variable Cost”?

A variable cost is a cost that does change depending on the volume of your sales. For instance, when the demand for your product increases, the cost of materials to meet that demand will go up, too. 

FINANCIAL TIMES IS SO YESTERDAY

Join FinTastic to stay up to date on the latest in finance and business.

Small Disclaimer...by joining our FinTastic News you agree to our Terms & Conditions. But we promise to never send you any spam! 🤞

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

Book a Meeting