When you use QuickBooks, you use either cash-basis accounting or accrual-basis accounting. (I describe the difference between these two methods in Appendix B.)
Cash-basis accounting is fine when a business’s cash inflow mirrors its sales and its cash outflow mirrors its expenses. This situation isn’t the case, however, in many businesses. A contract builder of single-family homes, for example, may have cash coming in (by borrowing from banks) but may not make any money. Alternatively, a pawnshop owner who lends money at 22 percent interest might make scads of money, even if cash pours out of the business daily.
As a general rule, when you’re buying and selling inventory, accrual-basis accounting works better than cash-basis accounting. However, cash-basis accounting typically defers income taxes.
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