1 Business accounting
‘Remember that credit is money.’
Benjamin Franklin, American statesman, diplomat, writer, scientist and inventor
In a nutshell
Cash is not the same as profit.
Company accounts are prepared on the ‘accruals’ or ‘matching’ basis. This principle acknowledges the timing differences inherent in, and arising from, business transactions.
Sales and expenses should be ‘matched’ to the period when a transaction takes place, whether or not cash has changed hands.
Put simply:
- –sales are recognised when they are ‘earned’, as opposed to when cash is received
- –expenses are recognised when they are ‘incurred’, as opposed to when cash is paid.
Accruals accounting helps a business to identify its actual profit and net worth.
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