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Accounting Principles 101, Part 1

November 5, 2019 by OSYB Staff

Did you know that there are rules and regulations about how to keep your financials? Intuit QuickBooks shares that “the Financial Accounting Standards Board (FASB) establishes a set of generally accepted accounting principles (GAAP) so that businesses in the United States can maintain uniformity with their financial information”.

Start with knowing that there are two primary different accounting methods and you have the choice when compiling financial data to use either the the cash or the accrual basis of accounting. Each method utilizes clear distinctions of how business transactions are logged.

Cash Basis of accounting strictly applies cash payments in hand and records expenses when paid.

  • income recorded upon receipt
  • expenses recorded as paid
  • accounts receivable or accounts payable are not taken into account

Accrual accounting is very different.

  • registers income at the time of sale even if sales will be invoiced at a later date
  • registers expenses at the time of purchase even if the purchases are bought on credit
  • accounts payable and receivable are taken into consideration.

“So, the difference is that the cash basis method recognizes revenue and expenses only when the cash enters or leaves your bank account, while the accrual basis accounts for contracted revenues and costs that haven’t been received yet.”

Keep in mind that the GAAP does not recognize cash basis as an accepted accounting practice. Next post will share the principles that GAAP covers.


For full article: Accounting principles for small business owners

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