One of the big differences between how most people start out with
accounting, and how professionals and big companies do it, lies in the
distinction between cash basis and accrual basis accounting.
Cash basis accounting is the simple, obvious, kind: we record transactions as
they happen, and our ledger account balances reflect how much money is really
present (or owed) right now in various accounts.
It might seem at first like this is the only possible or sensible way of
tracking things, but accrual basis methods also have an intuitive appeal of
their own, despite being rather different.
Consider, for example, a scenario where you complete some contract work but
haven’t been paid yet; or are at a job a week before your latest pay-cheque is
due. Naturally, you’d consider that you’re owed your wages, even if you don’t
have anything written down in your cash basis accounting ledger. Or, to flip
it around, if you receive a bill for this past month’s utilities, you know you
owe that money even if it too isn’t in your ledger yet. Accrual basis
accounting just means writing down these obligations at the time they’re
incurred, rather than at the time they’re paid.
(This post is part of a series describing how
I use the Ledger accounting system. For
an introduction to ledger and this series, or to see all the entries, have a
look at the first