Learn or review some accounting basics such as cash based compared to accrued accounting.
Debits and Credits
Keeping debits and credits straight are an important part of accounting. Remember that:
- When you add money to your checking account, that is a Debit in your general ledger (Dr).
- When your bank loan increases, that is a Credit in your general ledger (Cr).
Also remember that:
- Expense amounts are normally Debits (Dr).
- Income amounts are normally Credits (Cr).
Instead of referring to General Ledger or Trial Balance amounts as Dr and Cr, they can also be referred to as simply + or -. It this is being done, the convention is that Debits will be positive (+) and Credits will be (-).
Cash Versus Accrued Accounting
A cash based company is one that reports income to the IRS based on money actually received from customers. If a customer's invoice has not been paid, then this is not considered as income.
Similarly, with a cash based company, expenses are not reported to the IRS until they are actually paid. This is why many companies work hard to get all their bills paid before the end of the year. This reduces their profit for the year, and therefore reduces their taxes for the year.
Conversely, if a company is not cash based, it means they are using accrued accounting. This means they report expenses to the IRS even if no money has changed hands. An invoice sent to a customer is considered as income even if it has not been paid.
Likewise, with accrued accounting, an invoice received from a vendor is considered as an expense as soon as it arrives.