When you process an overall company health financial statement such as the Profit & Loss or a Balance Sheet, you may find inaccurate balances due to the fact that your Accounts Receivables and Payables need attention.
In my experience, it can be quite common to see a business owner disregard the value of each detailed (per customer) open Receivable and Payable, due to the fact that these open issues may be obsolete and therefore may have no bearing on the current Profit & Loss statement.
Whether you like to process cash or accrual basis financial reports, I always advise to process BOTH types (cash and accrual) and try to understand why the overall balances may be different on both reports.
Accrual basis is valuable because it collects all financial data from the period of time in which all financial transactions were dated (during that period of time), whereas Cash basis is valuable because it collects data from the period of time in which only actual cash or credit was exchanged; so open bills and invoices will NOT show up on a cash basis profit & loss report.
You never know when you will actually need an accrual or cash basis report, depending on who is asking for your financial statements. Also, accrual basis reports, if the books are maintained correctly, tend to be more accurate as far as gauging the overall health and profitability of your business. Cash basis is valuable to gauge the overall cash burn rate.
You don’t want to get caught up in having to rely on your vendors and customers to reconcile your payables and receivables balances to all the time. Plus it just overall helps knowing whom you owe money to and who owes you money at any given time, especially for future cash flow and credit purposes.
So, for different reasons (some of which I probably did not mention in this article), it is always best to maintain your entire books, including the receivables and payables, to the best of your abilities, as you never know what may turn into a big problem later on.
Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.