You might have heard these terms from your accountant. But do you know what they mean?
Accrual basis and cash basis accounting are two different methods of reporting your income and expenses. When your CPA files your business tax return, he must choose which method to use.
It all comes down to timing. The difference between accrual and cash reporting is a timing difference.
Cash based accounting records your income when you receive a payment from a client. Expenses are recorded when you pay your suppliers and vendors.
Accrual based accounting records your income and expenses when an invoice is created, regardless of whether the client has paid you, or you have paid the vendor.
If you use Houzz Pro, Ivy, Design Manager or Studio Designer for your bookkeeping, keep in mind that these systems are accrual-based systems. All these systems record income and expenses on the invoice date, regardless of when the client pays you or when you pay the vendor.
This is one reason that it is important to create invoices on every completed item. Best practice is to create invoices for each item as it is completed and delivered. The invoice shows that the sale is final, and records the income and cost/expense of that item.
Keep in mind, that in accrual-based systems, invoicing is the most important part of your accounting process.
As always, feel free to reach out to our team if you need additional information or assistance.