There are two principal methods of keeping track of your food truck’s income and expenses…the cash method and accrual method. Today we’ll look at cash vs accrual methods to help you determine which fits best for your food truck business.
Cash vs Accrual Method Of Accounting
Under the cash method of accounting:
- Revenues are reported on the income statement in the period in which the cash is received from customers.
- Expenses are reported on the income statement when the cash is paid out.
Under the accrual method of accounting:
- Revenues are reported on the income statement when they are earned. This often occurs before the cash is received from the customers.
- Expenses are reported on the income statement in the period when they occur or when they expire. This is often in a period different from when the payment is made.
Under the cash method, income is not counted until cash is actually received, and expenses are not counted until actually paid. Under the accrual method, income is counted when the sale occurs, and expenses are counted when you receive the goods or services.
The IRS requires businesses to use the accrual method in several instances, including if the business has inventory, if the business is a C corporation with gross annual sales exceeding $5 million.
So in basic terms, your food truck should be on the accrual basis unless you pay cash for everything. Cash based financials are basically worthless in a food truck. This is because it’s nearly impossible to tell what your true profit picture is.
While neither method is perfect, you can make the most of the option you choose by understanding what the numbers produced mean. Then use them to answer your business’s specific financial questions.
RELATED: How To Determine If Your Food Truck Is Making Money
The Bottom Line
A more detailed discussion on cash vs accrual methods is beyond the scope of this article; however, you should discuss this topic with your accountant when setting up your financial management system. When it comes to significant accounting decisions like selecting cash vs accrual method, consulting a professional can help you feel confident that you’ve made the best choice for your food truck business, as well as afford you valuable, strategic advice going forward.
What side do you fall on in the cash vs accrual method of accounting with your food truck? We’d love to hear your thoughts on this topic. You can share your ideas in the comment section below or on social media. Facebook | Twitter