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If you are using a cash-based accounting method, you record a sale when you receive payment. In this case, you only need to keep two journals (disbursements and receipts) and a ledger at the end of the month. There are two terms you will learn soon enough as a business owner: accounts receivable and accounts payable. Accounts receivable means that you have sold a product or service and have not collected the payment yet. Accounts payable is when your business has purchased a product and service and you owe money to the supplier.

Accrual-based accounting is more useful when affording credit to a client or maintaining a large inventory. In this case, you would enter the expense of the item when it is incurred, regardless of when you make the actual payment. When you make sales on credit, you would enter them into your books as sales and record them on your accounts receivable log. After you receive payment, you adjust your accounts receivable and enter the transaction in your cash receipt journal. When you use credit to purchase inventory, you would make an entry in your accounts payable. You would enter the transaction on your cash disbursement journal when you make a payment.

Even though the IRS allows for cash-based accounting, the accrual-based method is more accurate and is preferred by most businesses. It takes more work to keep records in accrual-based accounting, but the information will help you make better business decisions because your will have a more accurate picture of the overall financial health of your company.