Cash vs. Accrual Accounting

You'll hear these terms a lot when starting up a business. Which one to use and what do they mean? Well basically Cash accounting means you only focus on cash inflows and outflows in your record keeping. When money comes in your hands (or your bank), you record it as income. When it leaves your hands (of your bank), it is an expense. Accrual accounting, on the other hand, means you book the incomes or expenses when the underlying transactions are made. If a customer sends you a purchase order for $500, you would record that $500 as revenue (income) with the order, and not wait until you actually get the money. Most startups use cash accounting since they live or die based on cash flow, but more established businesses usually go with the "more proper" accrual accounting. For more on this, read about it in this nice article.