Accrual Accounting Explained
Understanding the "when" of recording income and expenses.
Cash vs. Accrual: What's the Difference?
While Ogeemo's BKS system simplifies bookkeeping by focusing on a cash basis, it's important to understand another key method: accrual accounting. The main difference is all about timing.
Cash Accounting
Focuses on cash flow.
You record transactions only when money physically changes hands. You log income when you receive payment, and expenses when you actually pay them.
Accrual Accounting
Focuses on profitability.
You record transactions when they are earned or incurred, regardless of when money moves. You log income when you send an invoice, and expenses when you receive a bill.
An Example: The Consultant
Imagine you do a project for a client in March and send them a $5,000 invoice. The client pays you in April.
- Under Cash Accounting: It looks like you made $0 in March and $5,000 in April. This accurately shows your cash flow, but not when you actually did the work.
- Under Accrual Accounting: You record the $5,000 revenue in March, when you earned it. This gives a more accurate picture of your business's performance and profitability for that specific month.
Why It Matters
Accrual accounting provides a more accurate view of a company's financial health and profitability over a specific period, which is what banks and investors typically want to see. Ogeemo's Accounts Receivable and Accounts Payable modules are designed to help you track these accrual-based items, giving you the foundation for advanced financial reporting when you need it.