when accrual accounting is used a company records income when completing a service or delivering goods if an inventory is required when accounting for a company s income and the company has gross receipts with an average of over 26 million over the prior three years the company normally uses the accrual method of accounting for sales and purchases 1
a company selling merchandise to a customer on store credit in october records the transaction immediately as an item in accounts receivable ar even if the customer does not make a cash payment on the merchandise until december or pays in installments the transaction is recorded as income for october the same goes for goods or services the company purchases business expenses are recorded when the products or services are received supplies purchased on credit in april are recorded as expenses for april even if the business does not make a cash payment on the supplies until may if a customer buys something on credit it will immediately be recorded as a transaction if the company selling the good uses the accrual accounting method transactions using cash accountingmost small businesses especially sole proprietorships and partnerships use the cash accounting method income is recorded when cash checks or credit card payments are received from customers let s say a business sells 10 000 of widgets to a customer in march the customer pays the invoice in april the company recognizes the sale only after the cash is received in april meanwhile expenses are recorded only when a payment is made a business may purchase 500 of office supplies in may for example and pay for them in june the business recognizes the purchase when it pays the bill in june for tax reasons the cash basis of accounting is available only if a company has an average of less than 26 million over the prior three years in annual sales 1 the cash basis is easier than the accrual basis for recording transactions because no complex accounting transactions such as accruals and deferrals are necessary its drawback is that the profit of the business may vary wildly from month to month at least on paper 