The topic is Cash vs. Accrual accounting.
Basically, you have to choose one of these accounting methods . . . at least until your company gets large. There are specific thresholds at which you are required operate on an Accrual method.
For small businesses, you still have choices.
Personally, I have always used the Accrual method of accounting my businesses. Here I explain why I do that and how it helps me keep revenue and cost of goods sold lines up in my accounting system.
Feedback welcome, as always.
The idea of aligning your January costs with the January revenue is referred to as the "matching concept." This only exists in accrual accounting. This principle requires that you match revenues with expenses in the same period.
The only area in which I might disagree with your video is the credit card charge on the 15th of the month. If that charge is directly related to revenue, it should be recognized in the same period as the revenue was earned. If that charge was for a service, the expense should be recognized in the month the service was received.
But, for simplification purposes, let's assume the service was received and paid for on the 15th of the month. That's when the expense is recognized.
Always excellent advice Rayanne. Wish you were teaching classes over at Great Little Seminar. Oh - You ARE!!ReplyDelete
Thanks for the input.