The TruckLogics crew is back with the next installment of our Business Management Breakdown series. This week we are breaking down cash vs. accrual accounting and why you need to know what they are.
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 of what they’re all about.
Before 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.
Cash accounting has its purpose. It’s good to know who is paying you on time, who isn’t paying on time, and what your actual cash balance looks like. It just doesn’t help with forecasting and planning ahead in a highly aggressive and ever-changing industry such as trucking.
Now 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.
Basically, under the accrual basis of accounting, you will count the transaction for when the order was made, regardless of when payment for the service is received. You won’t wait until you see the money to record the transaction like you would under the cash basis of accounting.
Cash & Accrual Accounting in TruckLogics
You have the option to pull a Profit & Loss report for either the cash or accrual accounting method. We make it really easy to switch between both, so you can always know the financial status of your business.
Pro Feature Live Presentation
TruckLogics has more Pro Features to streamline your business management. Join the TruckLogics crew on September 24th at 4:00 PM EDT for our Pro Features Live Training Session followed by a Q&A to answer any questions you have. Reserve your spot today!
Contact the Crew
If you have any questions or would like to schedule a personal demo of TruckLogics, give us a call at 704.234.6946 or email us at [email protected].