One of the main differences between the cash and accrual methods of accounting is when revenue and expenses are reported. In a cash method, revenue is recognized when money is actually received and an expense is posted on the date it is paid. This method is used often by service businesses because they do not typically carry substantial inventory. There are some businesses that cannot use a cash method. Some examples are:

* A corporation (other than S) with revenue exceeding $5 million

* A business that carries inventory

The accrual method reports income when work or product is sold. In other words, when an invoice is generated for a sale that income is considered received in terms of bookkeeping. Expenses are reported when the bill is received not when the money physically leaves the bank account. This method requires that at the end of each period the books are “closed” and adjusting entries are made. Some examples of period-end adjustments are:

* Prepaid Insurance (Credit the asset account, Debit the expense)

* Transfer revenue to the Retained Earnings account (Quickbooks does this for you)

* Prepaid Expenses

* Inventory adjustments

You can find more information by visiting the IRS website and reading Pub 538.