The following example hi-lights the difference between the two methods. Remember the break-even point analysis that was done for my fictitious client Oak Desk Clocks, Inc.? I am going to use the budgeted figures from the year 2009 for this illustration. To follow are those budgeted accounts and dollar amounts:

• Gross Sales $351,869
• Cost of Goods Sold $153,017
• Advertising $23,852
• Officer Wages $100,000
• and Fixed Costs $75,000

Remarkably, Oak Desk Clocks, Inc. actual figures were the same as the budgeted figures for the year. They also sold a company van for a gain of $1,000. Under the accrual method of accounting their net income would be $1,000 as shown below:

Gross Sales 351,869 less Cost of Goods Sold 153,017 less 198,852 (the combined total of Advertising Expense, Officer Wages and Fixed Costs) plus the gain on selling the company van of 1,000 = Net Income of $1,000.

Now, suppose that Oak Desk Clocks, Inc. is owed $55,000 by customers and they also owe their vendor that supplies the oak for the clocks a couple of invoices totaling $35,000.

Remember, under the cash method of accounting revenue is recorded when it is received and expenses are recorded when they are paid. So if Oak Desk Clocks, Inc. uses the cash method of accounting at this point it is as if the $55,000 in sales and the $35,000 in expenses do not exist.

This is how their net income would be figured under the cash method:

Gross Sales would now = $296,869 (351,869 less accounts receivable of 55,000)

Cost of Goods Sold would now = $118,017 (153,017 less accounts payable of 35,000)

The $198,852 for the other expenses did not change - nor did the $1,000 gain on disposal of the van.

Net Loss under the cash method is ($19,000).

Same facts and circumstances for the business but using a different method of accounting results in a difference of $20,000.

Next I will show how to format a chart using Excel's Chart Wizard to represent these figures under both the accrual and cash method.