Believe it or not, very basic math skills (addition, subtraction) are all that's needed for accounting. Hard to believe, but it's true. For many businesses, cash accounting works great, but for a trucking business, accrual accounting is usually the way to go. Not the most pleasant of names, but it does the job of displaying an accurate view of your financial status. Let's get to the good stuff and break down these accounting terms so you have a better grasp on what they're all about.
Cash AccountingBefore we discuss accrual accounting, you need to know about the cash basis of accounting. Cash accounting recognizes revenues as soon as cash (payment) is received, and expenses as soon as they are paid. Cash accounting works best for businesses that receive payment as soon as the service is performed. There are no receivables or payables to track, so your bank balance will show exactly how much cash is at your disposal.
Accrual AccountingNow that you know the basics of cash accounting, you will be able to better understand accrual accounting. Don't let the name scare you, it really isn't a difficult concept to understand.
Let’s break out some examples to really get a grasp on accrual accounting…
Ex. You haul a load on the 17th of September and set the invoice deadline to be net 30 (due in 30 days).
- Under cash accounting, you wouldn’t show that load as income until Oct. 17 - a whole month after you hauled it. When you run a Profit & Loss report for the month of September, you will not see the income generated by that load (and potentially other loads with a similar situation) since you didn’t get “paid” for them in September. Suddenly, your income vs. expense ratio isn’t looking so good for September since all of your expenses are showing, but the income won’t be recognized until October.
- Under accrual accounting, the income you receive for hauling the load in September, where the invoice is due in 30 days, will be counted for your September income and not October. The income will be recognized for September because that is when the service was performed. Your income vs. expenses ratio will show accurately and won’t display negative revenue because income is recognized when you hauled the load, not when you received payment. You perform a service (say haul a load) and set a 30-day deadline for the invoice to be paid.