There are two different methods when it comes to recording income and expenses: cash basis and accrual basis.
» Cash Basis—Income is recorded when the money is received and expenses are recorded when the money is disbursed.
» Accrual Basis—Income is recorded when money is earned but not necessarily received and expenses are recorded when they are incurred and not necessarily when the money is disbursed.
For example, say you sold an item for $200 but won’t get paid for it until next month. Using cash accounting you would record that $200 when the person hands you the $200 the next month.
On the other hand, using accrual accounting you would record that $200 at the time of the sale regardless of whether or not you have received the money.
Non-profit organizations, such as churches, tend to use cash accounting based on a variety of reasons.
- Cash accounting is much simpler to understand.
- Tracking the money going into and coming out of one or more bank accounts is straightforward.
- Cash accounting is also safer, since you are less likely to be surprised by cash flow problems.
- Easier to explain to the congregation or church leaders.