There are two main ways businesses report their income: accural and cash. In the accrual method of accounting, revenue and expenses are recorded in the period in which they are earned or incurred, regardless of whether cash is received or disbursed in that period.
The cash method accounts for cash receipts when received and cash expenditures when paid. This method operates much the same as a personal checkbook, so it gives you a good representation of your cash flows but not of your overall profitability. In a cash system, the cost is expensed when items are paid for, like inventory or fertilizer. Thus, these prepaid assets are not reflected on a balance sheet as they would be under an accrual system.
Accrual accounting often uses the cash method of accounting during the year but adds or subtracts inventories of products and production inputs on hand at the beginning and ending of the year. For this reason, accrual-basis records are more complete than cash-basis books and better represent the true financial position of an enterprise. This is why it is often used for management decisions.
Many of the popular computerized record-keeping programs can effortlessly switch between reporting on either an accrual or a cash basis. Many Cooperative Extension educators involved in farm management or small business educational programming have extensive experience in implementing these types of record-keeping systems.
