What is accrual accounting and why does GlobalTill use it?
In accrual accounting, revenues and expenses are recorded when they occur. Income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not.
In cash accounting, revenues are recorded when payment is actually received and expenses are recorded when the expenses are actually paid (regardless of when they were invoiced).
The key difference between the two types of accounting is when revenues and expenses are recorded.
- In accrual accounting, the revenue is recorded immediately
- In cash accounting, the revenue is not recorded until the payment is received
It's important to understand that GlobalTill uses accrual-based accounting. In the past we have seen some retailers leave customer invoices in draft status until a payment is received by the customer as an attempt to use GlobalTill according to a cash based-accounting system. This is not supported and not recommended.
The supported method in GlobalTill follows the following process:
- Create a customer order when a customer order is received (not an invoice).
- Take a deposit on the customer order if they are paying ahead of time.
- Convert the customer order to an invoice the moment that the customer takes the merchandise. Post the invoice.
- Record the payment when the customer pays, regardless of whether it's upon invoice or weeks later.
Why GlobalTill Works Based on the Accrual-Basis Accounting
While some stores use cash accounting because it offers an "at-this-point-in-time" picture of the business's cash flow, accrual-based accounting gives a more accurate picture of the longer-term state of the business, as well as provides for more accurate inventory. Accrual accounting also makes it easier to match revenues with expenses.
Consider inventory issues. What happens when you do not invoice customers when the product is taken? What happens if you decide to leave the invoice in the draft? Your inventory numbers are incorrect. Staff trying to look up on-hand quantities at the register will not have an accurate number. And, if you perform an inventory count during the time the invoice remains in draft awaiting payment, you will be introducing errors into your inventory counts.
For this reason, GloballTill's purchasing, ordering, and selling systems are based on the accrual accounting basis.