If you get a huge purchase order from a new customer, that would show as income
This is NOT true.
A purchase order is a promise to buy, nothing else. It does not become income under any accounting method until you actually invoice that customer. That normally occurs when you actually deliver products or services to them.
Once you invoice that customer, it is considered income using the accrual method whether or not your customer pays their bill. It only becomes income using the cash method when they actually do pay the bill. I imagine that's the distinction OP was trying to point out.
Moral of the story: for accounting advice, seek an accountant, not a blog entry posted on hn.
Technically true, but the reaction to a purchase order is typically to issue an invoice.
In any case, the argument is still true -- you invoice on a certain day, but payment can happy any time. So just replace "PO" with "invoice" and it's still correct.
...the reaction to a purchase order is typically to issue an invoice...
This is also not true, at least not anywhere I've ever been.
The typical reaction to a purchase order is to fulfill it, then invoice it. This is an absolutely critical distinction. Until an actual accounting transaction occurs, your books are not affected under any accrual method. A PO is not an accounting transaction.
So just replace "PO" with "invoice" and it's still correct.
No, replace "PO" with "invoice" and it becomes correct.
You obviously have something important to offer and your your advice is well intentioned. But your lack of precision on this accounting matter (just like a technical or legal matter) can cause more confusion than help. Or worse.
I really didn't mean to nitpick, but nitpicking was warranted at such a glaring error in terms. Lots of people here don't understand such matters and people like you and me should just leave this kind of advice to the appropriate experts.
Except that a Purchase Order and Invoice aren't interchangeable in accounting terms.
A Purchase Order is the customer saying "I want to order the Big Mac Meal". An Invoice is you saying "That will be $5.95 please".
A cash accounting system is essentially giving the option back to the customer (from your perspective at least) of being able to walk out the door. An accrual system does not, as the inference is there that you will chase them to pay.
You would usually use the former if there is the ability to dispute the invoice (i.e. it is linked to a delivery of a specific product) because you don't want to be paying taxes on income that you may or may not receive.
You can use the latter more effectively if there is an expectation of payment, (like a SasS contract) because it is simpler overall.
>A cash accounting system is essentially giving the option back to the customer (from your perspective at least) of being able to walk out the door. An accrual system does not, as the inference is there that you will chase them to pay.
Having been in both situations, I disagree with this summary.
You write down the bad debt in the situation of the unpaid AR in accrual, in cash, you close the invoice however you wish to do so. It's not like you stop tracking invoices in cash based accounting or who owes you money.
The real big deal between accrual and cash is "control of large expense timelines" which you can pick which date you add them in when doing accrual, and you can't when you do cash. If you do a lot of business that falls over the end of your fiscal year (not a problem in my part of the woods) this can be an issue.
Most of the rest of the changes are just changes in amount of paperwork.
I'm in the UK and Xero works perfectly for me and makes everything really manageable. Reconciliation of bank accounts is built in (can even autosync with HSBC), reporting is built in, invoicing and payments received it built-in, everything including asset depreciation.
Yet it's:
* Web-based
* Has accountancy firms behind it (makes audits very easy)
* Very simple to use with great support and help (stuff like this article's content was a no-brainer)
* Shareable... give your chartered accountant access!
I have no connection with Xero at all, but since they've made pleasurable one of the aspects of starting a business that I feared I would and am heartily recommending them to UK startups (I don't know if they're set up for US, do your own homework).
Accounting is one of those things that I drag my feet to learn and practice (along with taxes) when I would rather be coding.
Xero is the best app that I've found for keeping the day to day record keeping simple but you still need an accountant to have as a resource to ask questions and to check the books, especially around tax time.
Thanks for the promotion (yes QB is weird and difficult).
However the article isn't about software, it's about why it's useful to use different accounting perspectives depending on what information you're wanted to get from your books.
So e.g. for daily operations you need a different perspective from budgeting.
I've made the mistake of accrual accounting when not needed before. The current company I own for does cash based accounting, and wow, what a difference.
Accrual is easily 5 times the work for many types of businesses than cash is. You have to touch the books twice for Everything. Things you'd only do as an afterthought in cash you have to make into a careful ordeal.
To quote one accountant: Until you can afford a full-time bookkeeper, why are you thinking about doing accrual? (at 5 million revenue you have to swap to accrual or $1 million revenue and hold actual goods in inventory).
If you're worried about your ability to do projections, I'm honestly going to say that cash basis is much closer to your actual resources on hand than accrual.
Accrual methods make sense when you don't have a physical product and invoice at regular intervals, especially if you have any type of retroactive invoicing and/or charge any type of interest or are remitting to a third party.
Cash methods would be nightmarish in this circumstance.
This pretty much exactly describes a huge portion of the business we do. I've found cash basis very very nice in comparison to accrual for this exact use case. (And was what was recommended by an accountant in particular).
Does your accounting software make it unable to track invoices if you're not doing accrual or something? Mine does invoicing, AR, and other accounts just fine.
actually accrual accounting is 5 times easier than cash. perhaps with the tool like quickbooks, this is not so obvious but accrual is CORRECT accounting and every business out there should use it whether you pay your taxes on cash-basis or not.
let me explain, when you give customer an invoice, you want to see in your books that this person owes you $1000. on cash-basis you would completely ignore this transaction for accounting purposes until client pays which is non-sense as it could be easy to forget this invoice forever and never receive payment for your products or services.
people get confused but cash-basis accounting is not really an accounting, it's just calculation method for your taxes.
Outstanding invoices are quite clearly still shown in my accounting program. They're not counted on income until the event of payment though.
The invoicing program even auto-reminds late payers when they're past due. I can generate reports to show my company's AR whenever I want and open to a dashboard of that screen actually
Losing track of AR is just poor bookkeeping. It's not a feature of cash bookkeeping.
My AP is not as well tracked, that's for certain. Once expenses are paid, that is tracked, for sure, but owed debts/bills/etc aren't. That never was really something that interesting in the accrual based system.
This is NOT true.
A purchase order is a promise to buy, nothing else. It does not become income under any accounting method until you actually invoice that customer. That normally occurs when you actually deliver products or services to them.
Once you invoice that customer, it is considered income using the accrual method whether or not your customer pays their bill. It only becomes income using the cash method when they actually do pay the bill. I imagine that's the distinction OP was trying to point out.
Moral of the story: for accounting advice, seek an accountant, not a blog entry posted on hn.