Not Until The Cash Is In The Bank
If you are not clear on when and how a sale occurs in your business, you can never manage your company properly.
So what is a sale? If you use accrual accounting, then a sale is defined this way:
The buyer accepts the goods and either pays the seller or incurs an obligation to pay the seller.
If you use cash accounting, however, a sale is defined this way:
The buyer accepts the goods and pays cash to the seller.
To be prudent, always use the cash definition of a sale even if you use accrual accounting in your business. Why? Because, simply put, until you have the cash, you don’t have the cash. As a former client of mine was very fond of saying:
Good funds means you have:
- Received an electronic wire transfer OR
- Deposited cash into your bank account OR
- You have deposited a check and the funds have cleared.
To summarize:
- It is not a sale if you deliver and the customer has promised to pay.
- It is not a sale if you deliver and send an invoice.
- It is not a sale if you receive a check from your customer.
- It is not a sale if you deposit your customer’s check in the bank.