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Community Host

Re: Does Your Business Use Cash or Accrual Method Accounting?

Hey Kristen! 

 

Coming from the perspective of the person handling the cash and not recording it into QuickBooks (*gulp, I am out of my league*), since we dealt primarily with cash and receipts, not future payments, I was under the impression we'd get a clearer understanding of where we stand if we were on a cash basis.

 

Catering was the one situation I thought there might make a big difference, thanks for clarifying that. That's the one realm of service I've never been in. 

 

Your last point is very important - it's important that owners look at the long-duree, not just the here and now. Do most owners understand both concepts, or does it take a bit of training?

 

The factoid was told to me by my accountant friends, but I doubt they have anywhere near the experience in service you have. I default to your restaurant expertise!

Community Host

Re: Does Your Business Use Cash or Accrual Method Accounting?

Hey Kristen! 

 

Coming from the perspective of the person handling the cash and not recording it into QuickBooks (*gulp, I am out of my league*), since we dealt primarily with cash and receipts, not future payments, I was under the impression we'd get a clearer understanding of where we stand if we were on a cash basis.

 

Catering was the one situation I thought there might make a big difference, thanks for clarifying that. That's the one realm of service I've never been in. 

 

Your last point is very important - it's important that owners look at the long-duree, not just the here and now. Do most owners understand both concepts, or does it take a bit of training?

 

The factoid was told to me by my accountant friends, but I doubt they have anywhere near the experience in service you have. I default to your restaurant expertise!

Established Community Backer ***

Re: Does Your Business Use Cash or Accrual Method Accounting?

@JamesOng & @girlFRIDAY I do understand how you could say to use Accrual Basis for Restuarants or Retail locations where you are paid right then, but for some other businesses such as ours, most of our customers don't pay for 30-90 days. That's alot of cash to have to record and pay taxes on, especially since we haven't even received it yet. 

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Re: Does Your Business Use Cash or Accrual Method Accounting?

I totally buy in on this @jessbru99568

that's the beauty of being able to choose!

Community Host

Re: Does Your Business Use Cash or Accrual Method Accounting?

@jessbru99568, great call, there's definitely a broad experience within the food industry. I also realize that while our bakery had a retail location, we also did a ton of weekly wholesaling for our bread and roasted coffee. This was definitely invoiced. 

 

I am starting to buy into @Raywhite28's hybrid method more and more Smiley Happy

Community Contributor *

Re: Does Your Business Use Cash or Accrual Method Accounting?

Did the workshop reveal there are fewer entries required for the Cash accounting in Quickbooks than using the accrual method? That would make cash accounting more time efficient, right?

Community Host

Re: Does Your Business Use Cash or Accrual Method Accounting?

Hey Bill (@JMI-Bill),

 

Welcome to the conversation. Not sure which workshop you are referring to, but the conversation seems to indicate that most use Cash basis accounting.

 

The method is arguably easier since you are only accounting for money on hand as it is received or paid out. For businesses that deal with lots of immediate transactions, not A/R and A/P, the cash method is definitely more efficient.

 

There are fewer steps involved with recording sales receipts vs. sending an invoice, but your accounting method is looking at the cash on hand and not necessarily the steps involved - - that is, if you were paid for the invoice, you received and deposited the money, that money is now counted with the cash method. Accrual would also count "in process" (unpaid) transactions. 

 

Does that make sense? Which method are you using?


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Re: Does Your Business Use Cash or Accrual Method Accounting?

My clients are all Govt contractors, who are required to follow GAAP accrual-basis method of accounting on their books but some do accrual and some do cash -basis for income tax.  Big advantage of accrual-basis is matching revenue with expenses that earn that revenue.

Big advantage of accrual-basis taxes is that tax returns match more closely to your books.

Big advantage of cash-basis taxes is that you don't pay taxes on revenue not yet received.

Community Contributor *

Re: Does Your Business Use Cash or Accrual Method Accounting?

As a S-Corp, my quarterly profit is taxed as Personal Income. I do not need to complicate the accounting for my medical services business by using the Accrual basis (A/P, A/R, Invoicing & Inventory are not needed) and will go with Cash accounting as my CPA has recommended. The entries for deposits and expenses into QB are simplified and therefore less time is required to do the bookkeeping.

Community Host

Re: Does Your Business Use Cash or Accrual Method Accounting?

@Teri

 

Great insight, I didn't realize that government contractors had to follow accrual-basis. Is that essentially anyone who works on contract for any local or federal agency? Or just specific groups?

 

Which do you recommend to those who are new to accounting?

Community Host

Re: Does Your Business Use Cash or Accrual Method Accounting?

@JMI-Bill, at a high volume, cash basis accounting is quite a bit faster - fewer steps and less "in progress" transactions to deal with.

 

Maybe you could eventually go with @Raywhite28's hybrid method. 

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Re: Does Your Business Use Cash or Accrual Method Accounting?

All Federal Government contracts are subject to FAR (Federal Acquisition Regulation) and GAAP (Generally Accepted Accounting Principles) including Accrual-basis accounting as audited by DCAA (Defense Contract Audit Agency), which may audit 100% annually once you are awarded a contract type = CPFF (Cost Plus Fixed Fee).  Prior to contract award, same practices are required and expected, but less likely to be audited by DCAA.

Prior to being awarded a CPFF contract, the company must pass Accounting System Audit including demonstration of accounting processes A-Z with an audience while auditors (3) watch over your shoulder and take notes while looking at a copy of your company's written manual of compliant accounting policies and procedures followed.  

 

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Re: Does Your Business Use Cash or Accrual Method Accounting?

One advantage for any business to be able to look at one of my two favorite reports to see the big picture all on one page. The Income Stmt by Month by Account, where you can see each month's P&L side by side.  Here you can look for missing amounts, like for example, the account for Office Rent is probably same amount, so should be same in every month.  Then if a month is blank, you know you did not pay or did not post or used wrong account. Or say you know the phone bill is usually $200 per month and this month is $400 and you might not know that if not seeing side by side, then you can check if you got double-billed. This is usually called Trend Reporting to compare. This is looking at horizontal account line.  The vertical columns are also better viewed on accrual basis to more easily spot any anomolies since when March revenue and March cost are in same column you can see if you made a profit in March or not.  If months are mixed, like say March revenue was high but posted on cash basis in April along with low April cost, you might think you made a profit but did not, so should not spend that amount just yet.

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Re: Does Your Business Use Cash or Accrual Method Accounting?

I would say it is a matter of input vs. output, if you want good information on reports then more complete (vs. random) input is usually better for analysis with accrual basis as well as for budgeting on accrual-basis. When you do next year's budget you look at last year so can clearly see what your cost is monthly (which month does rent go up, etc.) to project a clear picture of your next year cost and revenue anticipated. Waiting till year-end to review can be detrimental to some small businesses without seeing a true view of what is ahead.

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Re: Does Your Business Use Cash or Accrual Method Accounting?

I am also an S-Corp as are most of my clients and would not consider that to be a factor in choosing accounting method.  All businesses compute taxes on an annual basis but are expected to PAY quarterly estimated Federal income taxes, on cash or accrual basis setup for TAXES but BOOKS may be different, based on cash or accrual basis. Easiest if they are the same, but often there are better reasons than easiest. 

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Re: Does Your Business Use Cash or Accrual Method Accounting?

I would say that most anyone outside of accounting thinks on Cash-basis of accounting, since that is how most individuals handle personal "accounting and taxes."  Biz owners

may have no clue there are two different methods.  I would assume they do not and be

sure to explain to them to make sure you are on the same page on what you are doing.    

 

GAAP Accrual-basis accounting is required for all of my clients in our GovCon industry.   

Cost-type contracts require 100% audit includes verification of written Accounting P&P.

So this is important for the biz owner to know the difference and which method is used and have in place an accountant or bookkeeper who knows the difference to manage.   

 

I have found this can be a sensitive topic for some owners since they know they should know but usually don't.  Here is a doc I wrote and often share with clients to explain this.  Then they can read, understand and compare to current practice to share how they do, without having to admit they did not already know the different accounting methods.  

Community Host

Re: Does Your Business Use Cash or Accrual Method Accounting?

@Teri,

 

Great resource, thank you for sharing this. I think you're right that a big reason folks start and stuck with the cash method because they're comfortable with it

 

I am glad you're sharing the alternative in the community because I think sometimes we need to be taken out of our comfort zones - I am more concerned with doing something "right" than doing something "easy." Knowing the difference is the only way you will be able to make that 

 

When you have the conversation with business owners, is there a particular way you approach them, keeping sensitivity in mind?

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Re: Does Your Business Use Cash or Accrual Method Accounting?

Yes, ALL Federal Govt contractors are required to follow GAAP accrual-basis accounting, regardless of size.  I have had many clients who are one owner/employee, same rules.

This is regardless of whether they are Prime contractor or Subcontractor to Prime.

I can't speak for state or local since I have always worked Federal since 1985.

 

 

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Re: Does Your Business Use Cash or Accrual Method Accounting?

I see I did not answer your second question below.  As Govt contractors, biz owners will be told that GAAP Accrual-basis accounting is required, usually several times, but most have no idea what that means and often don't want to admit that to anyone, especially after in business for awhile.  So I like to share that doc when I ask so they can see before they reply and then can answer once they see the difference vs. being put on the spot w/audience.

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Re: Does Your Business Use Cash or Accrual Method Accounting?

Yes, but only good if they understand the difference. For one thing, running reports in QB does not change your accounting to accrual-basis as many, many people think that it does.

 

You must first be doing accounting on accrual-basis, meaning recording cost of expenses in the month received or earned using AP and AR accounts, etc. since what QB does for Cash basis reports is to remove what you have in AP and AR accounts. So Cash reporting DOES does switch reports from accrual to cash-basis, BUT only works the other way if entries exist.

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Re: Does Your Business Use Cash or Accrual Method Accounting?

I must say I am biased towards accrual-basis accounting since that is what I started out on as required in my industry eons ago.  I never even saw or did cash-basis until I started my own (accounting consulting) business a decade ago, so cash-basis is the weird one to me, that I have to actually think about since I teach accrual-basis to my clients all day long. So for my own biz, (not subject to GAAP GovCon regs), Cash basis taxes are best for me since I have alot of AR but no AP, so too much taxable income and so no desire to pay income taxes a year earlier than I receive the revenue taxed. I also think easier to recon books to taxes but will confess that I do a hybrid method for my own where I have my assistant do my books, and since my largest expenses are my labor, office rent, utilities, etc. are mostly fixed and all paid to me, I just make sure to get 12 months in each year.  Then variable expenses like my hourly assistant and other small unplanned expenses that are paid in cash, get booked in the month paid since not worth it to estimate to accrue.

Community Contributor *

Re: Does Your Business Use Cash or Accrual Method Accounting?

I must admit I prefer the accrual method to get the bigger picture but Cash vrs Accrual is a good thing to consider if your are not required to do the Accrual method. Under some circumstances as an S-Corp, using the Cash method may save you money. 

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Re: Does Your Business Use Cash or Accrual Method Accounting?

Save you money?  Assume you mean by postponing payment of taxes on revenue earned, but not yet received in cash, right?  Just remember the reverse is also true, that if you are paid in advance by clients, so you have the cash, cash-basis taxes, you must pay sooner.

ProAdvisor

Re: Does Your Business Use Cash or Accrual Method Accounting?

There seems to be some debate on that issue.

 

Comm. vs. Indianapolis Power & Light Co. 110 S. Ct. 589 (1990)

The U.S. Supreme Court made a distinction between the taxation of refundable deposits. The Court confirmed advance payments are generally taxable and defined "advance payments" as a non-refundable payment. With a nonrefundable payment the payee is "guaranteed" it can keep the money as long as the payee performs its own obligation under the contract.

 

Constructive receipt. You have constructive receipt of income when an amount is credited to your account or made available to you without restriction.

 

The key phrases are unrestricted and nonrefundable.. If it means to be refunded if work not completed, then it isn't income.

 

Opinions.

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Re: Does Your Business Use Cash or Accrual Method Accounting?

My experience with Deferred Revenue has always been when cash is paid in advance for IT work to be done usually for the next 12 months and recognized revenue monthly on accrual basis for books but when clients did cash basis for taxes then had to claim as cash received. If they did accrual-basis for taxes, they would not have to claim since not earned yet and in all cases it was a liability payable back to the customer if work was not completed or when a contract ended early.

 

Less clear is when client has been billed (but not paid cash yet), but revenue is unearned.  One of my clients has CPA (since 2005) who I am replacing, who has an asset account called Unbilled/Unearned Revenue and when I saw first TB it had a huge credit balance.  This seems so wrong to me since first assets should not have credit balance and revenue is not an asset account, and to me, AR Unbilled and Deferred Revenue are opposites. 

 

Anyone agree or disagree?