Some common questions we hear:
What is the difference between cash basis and accrual basis?
How does selecting cash vs. accrual affect my reports?
How do I decide whether cash vs. accrual is better for my business?
These are all very good questions!
Selecting cash vs. accrual is like trying to decide whether to count your chickens before they hatch or after.
On cash basis, your company counts money as being earned or spent WHEN MONEY CHANGES HANDS. That can be handing cash over, swiping a card, or writing a check. The date the income or expense is recorded and will show up on your profit and loss report is the date that the invoice or bill was PAID. This is why, when you look at a cash basis balance sheet, nothing shows up for accounts payable or accounts receivable unless there are credits owed.
On accrual basis, your company counts money as being earned or spent WHEN MONEY IS OWED. This means that your open invoices and bills will be included in your income and expenses on your profit and loss report, and the balance sheet will show accounts payable and accounts receivable balances that reflect the total owed to you by your customers and from you to your vendors.
So cash vs. accrual which is best for you?
I like to use both. It is easy to switch between cash and accrual reporting in QuickBooks and QuickBooks Online. For tax purposes, I use cash basis. I don’t want to pay taxes on money I haven’t received yet! However, for managing my business, I am able to learn more about my month to month trends by viewing my reports on accrual basis.
If your company has inventory or if you are in an industry that requires it, your may need to do your taxes on accrual basis. Check in with your tax preparer to find out which system you are currently using for your taxes. If you are just getting started in your business, make sure to get the advice of an accountant to ensure you are selecting the correct one for your company. Once you choose, changing can be a complicated process that may result in an IRS audit.
Once you get the hang of it, these reporting types can do a lot to teach you important things about your business finances. The more you know, the more you can plan for the growth and success of your business!