I've been reading up on the cash vs accrual accounting issues, and it seems that this subject should be touched upon in the guide. However, it seems that the issue really only exists in the business world, as most personal finance books use the cash method. This is important for GnuCash because our AP/AR system is (if I understand things corectly) an accrual way of accounting.
So, wadda ya think about the text presented below (I just wrote it, criticism will be very welcome)?
Oh, also, where should this text go? A new "intro to business" chapter? I don't think we want to have this anywhere near the personal finance people, so it should definitely stay in the later chapters... but where?
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There are two main methods of accounting, cash accounting and accrual accounting.
In the cash accounting method, you enter income into the books when you actually receive payment, and you record expenses when you actually write a check. Most personal finance is recorded using the cash method because it is simple to impliment, and fairly accurately represents most personal finance transactions. However, for business accounting this method suffers from some serious drawbacks. Most notably, it is difficult to determine your real financial standing when you buy or sell items on credit, a very common business activity.
In the accrual accounting method, you enter income in the books when you
make a sale, regardless of whether you have received payment or not. Inline with this, you record expenses when you receive goods or services, even if you will only pay for them at a later date.
The advantage of accrual accounting in a business setting is that it gives a more accurate picture of your finances within a financial period, even if payments will be arriving or leaving outside of this period of time. The biggest disadvantage to the accrual method of accounting is that it is more complex, requiring entry of a sale or purchase twice. Once at the time of the sale or purchase, and again at the time it is paid for.
The following is an example of a common problem with using the cash method of accounting in business. It is possible to artifically inflate apparent income in a period simply because many customers paid their bills from previous periods, but not due to increased sales. This kind of accounting distorts the financial view of the company, which may lead to making incorrect business decisions.
-- -**-*-*---*-*---*-*---*-----*-*-----*---*-*---*-----*-----*-*-----*--- Jon Lapham <[EMAIL PROTECTED]> Rio de Janeiro, Brasil Work: Extracta Moléculas Naturais SA http://www.extracta.com.br/ Web: http://www.jandr.org/ ***-*--*----*-------*------------*--------------------*---------------
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