I don’t have an accounting
background, but I do keep the accounts for our startup using Quickbooks. When I
first started using it, it asked if wanted to use cash or accrual accounting. I
didn’t understand the significance of the question.
My fundamental desire with
numbers and finance is simplicity. I want to be able to see how things fit
together. I want the bank account, my accounts, and the checkbook to balance.
Unfortunately, I chose “accrual
accounting” with Quickbooks. At the end of the first month, the cash balances
and the accounts were very very different. Once I started to think about this,
I realized that when I sent out an invoice, I recorded a sale but didn’t have
the cash. I also realized that when I recorded an expense, I had not actually
paid the bill. Then I found that if I made a mistake on the invoice or the
check, nothing balanced. I was totally confused.
Luckily, I identified this
confusion early on. It was then easy for me to change to “cash accounting” and things
began to make more sense. It’s not prefect, but it makes sense.