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

Just to be semantically accurate, If you use QB you use accrual accounting. You can choose to report on a cash basis, and/or file income taxes on a cash basis (regardless of the day to day accounting preference). And, as a note of interest, lately there have been some discussions in the learning/support community about the correctness of QBO cash P&L reports when the company has inventory.


That said, I use accrual. I can not see advantage to putting off the earning of income until it is paid. IMO if I am that cash strapped, then I probably need to reevaluate the business model and do something different to get more cash flowing in.

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

"Just to be semantically accurate, If you use QB you use accrual accounting"

You can select in QBs whether you are on cash or accrual basis. 

 

@JamesOng We use Cash Basis accounting for our books and taxes.  I think its a lot more accurate, we only report what was paid to us or paid out in the current year. Also easier to keep track of things, just my opinion, 

I don't think it really has anything to do with being strapped for money flow or not. Its just a different method to file. Smiley Happy

 

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

My business is cash basis as well.  Many of the businesses I work with are the same.  They are mostly small businesses.  The CPA actually recommended this to me way back when I started the business.

 

I think accrual basis gives you a true picture, real time of how you are doing, but I agree with @jessbru99568 above, I would rather not pay taxes on money not received yet. 

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

@lynda and @jessbru99568, you got right to the deeper purpose of the question - what cash and accrual method mean when it comes to reporting taxes. 

 

Another point, I was at a workshop a few weeks ago where were asked to plan our next 6 months of business based on cash/accrual report data side by side. Then the workshop leader asked us to consider the same question given two separate scenarios - one where we received all our A/R and another where no one paid their outstanding invoices.

 

Talk about insight ><.

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

Of course, you can write off the unpaid invoices to bad debt after they become uncollectable.  I would still rather pay on what I received for sure.  Interesting workshop though.  

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

@lynda, definitely, but I think the purpose of the exercise was to show how our perspective of the future can change considering those two scenarios.

 

Then again, we used a pretty radical example - $100k coming in from a single big account, which looks pretty good on accrual ;-). 

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

@jessbru99568wrote:

"Just to be semantically accurate, If you use QB you use accrual accounting"

You can select in QBs whether you are on cash or accrual basis. 

 

 

 


Not really, what you are selecting is reporting on cash basis, the actual accounting you do is accrual based.  If that were not true, and you actually could limit the accounting entries to cash based only - how would you be able to toggle from cash to accrual in reporting?

 

Cash means just that, no a/p or a/r.

 

@  everyone else

I guess it depends on your client base, if your clients/customers take, as the song says, "years and years to pay" then I can see why cash basis is important.  But in reality, the total amount of a/r carry over into next year is insignificant for any business I have ever had. 

And if you use inventory items, accrual is so much more accurate.

 

Taking things to the extreme, no one pays, is IMO kind of like statisics, sure it makes you sit back and go whoa, but reality is people pay, or your criteria for advancing credit needs to be reworked.

 

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

@Rustler, very good points. I think it behooves every QuickBooks user to run their reports on cash and accrual basis so they can make the most informed decision possible.

 

Lots of articles suggest looking at reports on a cash basis because it's "easier" to understand, but easier isn't necessarily better. 

 

Then again, if someone doesn't know where to start, going with what's easier may be the only way to get them looking at the data! 

 

So, do both! The very extreme example from the workshop is just to illustrate a point, not very reflective of reality. Hopefully, it motivated the attendees to think about their accounting more dynamically. 

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

Let's take today's news of accrual reporting gone bad. Toys R Us execs, against the wishes of the federal government, received a combined over $41 million in bonuses which , du eto accrual reporting, were forward thinking, meaning in plain English> accrual sales said the company made more than it collected but the bonuses were tied to inflated income.

 

In our business, renting apartments, we report cash basis. We invoice monthly but, as is the nature of the beast, have a certain percentage of income that never happens. If we reported accrual we would  be continually writing off unpaid invoices to bad debt. To us only cash in hand counts.

 

Think about it from a sole proprietor viewpoint, if you have to claim an extra 10%, representing unpaid invoices, for example as taxable income it just cost you an additional 15.3% off the bat for self-employment tax as well as yoru margunal tax rate on this unrealized profit.

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

@john-perowrote:

 

 

Think about it from a sole proprietor viewpoint, if you have to claim an extra 10%, representing unpaid invoices, for example as taxable income it just cost you an additional 15.3% off the bat for self-employment tax as well as yoru margunal tax rate on this unrealized profit.


That 15.3% you quote is not really what you pay for SE tax, half of that is credited back on the 1040.  7.65% is a more realistic number.  And partners also are self employed and pay that tax too.

 

I have rentals, I guess I am lucky, I have only had two deadbeats over the years, and I convinced one to pay the overdue amount before he vacated.

 

I just don't see the issue of writing off an invoice to bad debt as being a major issue  at EOY - just me I guess.

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

I don't see writing off a customers balance unless they go under. We had one customer not pay for 1 year. We just kept contacting them until finally one day we received the check in the mail. 

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

Hello All!

 

Personally, I prefer to approach the books and how things are entered from an accrual perspective for my clients.  Being they are restaurants, we don't have a ton of A/R to consider, but locating purchases in the period they were received is extremely important for things like food & liquor costs.  

 

That being said, a large number of my clients report taxes on a cash basis.  This is probably due to the election of S Corporation status for many of them.  Some new places even still operate as sole props.  

 

So, at the end of the year, I do the JE's required to true up to a cash basis perspective.  This essentially just means adjusting any accruals that might be spanning the year, and farming out any pre-paid expense balances (like insurances) I might have been spreading over each period.  AND of course, refraining from doing some JE's... like the final payroll accrual.

 

My clients know that some categories expense-wise will be wonky in late December and early January.  And I usually run a set of year end management reports before I do these special JEs and before any large year end adjustments are made my the accountant.

 

For my own business, I approach it all much the same way.

 

I personally like the fact that I have both methods of viewing data in mind when setting up and keeping the books.  I know that both methods can't be used for taxes, but taking the extra time to keep books that 'work' both ways reporting wise can really lead to valuable insights and be a great tool in explaining consequences that are sometimes difficult to model.

 

Since I"m a bookkeeper my job is to keep books that can work for taxes, sure.

But my purpose, my goal, is to keep books that make real world things more clear-- to both the accountant AND the owner.

 

Kristen

dmitry-ratushny-67024-unsplash.jpg

 

 

 

 

 

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

I use the cash method of accounting. It has been the easier way to report my taxes as well as keep my books in order.

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

It is not just the writing off to bad debt as it is more the forward looking having to claim as income yet not having collected the cash to pay the taxes in that income. You bill a client in December yet they pay in May, sure they are paying and you know they are going to pay, but you have to front a tax due prior to having the money in hand that caused you to have a tax due.

Big business, such as publicly traded corporations (even private such as TrUs) is required by the IRS to report accrual, they have no choice

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

@john-perowrote:

It is not just the writing off to bad debt as it is more the forward looking having to claim as income yet not having collected the cash to pay the taxes in that income. Y


That can be a problem, there is no doubt, again I am one lucky guy I guess, I have never had that kind of critical short fall in cash flow.  Still at the end of the year you could move that income to unearned revenue for tax purposes

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

Actually, you missed a method. There is a 3rd method called Hybrid. That is a combination of the cash method & accrual method.

 

At one point, if you sold products you had to be on the accrual method for the products sold. If you sold services you could use either cash or accrual methods. However if you sold products & services you can be on both methods. Cash for services & accrual for products hence the hybrid method.

 

Since then, that tax laws have change but some businesses are on the hybrid method.

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

If you thought I made that up. Please see link below.

 

https://thismatter.com/money/tax/accounting-methods.htm

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

@Raywhite28,

 

Great point, I made the options polarizing! But we live in a world with lots of middle ground Smiley Happy.

 

When do you think is the best time to do the hybrid method? A tangible scenario?

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

@john-pero,

 

Thank you for citing Toys R US, they've been top of mind for me as an example of "over-dependence on anticipated future outcomes." Sad to see them go, but everyone can learn from their example.  

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

@jessbru99568,

 

I am curious, is there an absolute limit on how long you'd wait for a payment?

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

@JamesOng To some extent yes, although it doesn't hurt for it to sit on the books (Since we are Cash Basis) Smiley Happy, except it would be nice to have the money, of course.

So far, we have only had one customer that has not and never will pay us. They owed us a few thousand, and went Bankcrupt. 

I do keep on the ones that are late or overdue, mostly with email reminders or nice phone calls seem to help. Smiley Happy

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

@girlFRIDAY

 

From what I hear, the overwhelming majority of restaurants and service businesses use cash basis because they're dealing with so many small transactions on a daily basis and need to recognize cash flow as it occurs.

 

For a restaurant, anticipating income A/R from a large future purchase probably wouldn't have a significant impact on the bottom line... but I wonder if it would benefit owners to look at expenses on reports from an accrual perspective, such as next month's new kitchen equipment investment. 

 

I've never asked any of the owners I've worked for what they used, but my guess is they were on cash basis. 

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

@QcFinancial long time no see! I am working on a piece that will help clarify using each method while running reports.

 

Do you recommend this to your clients as well? 

 

To all (who seem to be favoring cash basis), do you think there's a point where using accrual makes more sense?

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

@JamesOng

 

hmmm... not sure what you mean by recognizing cash flow as it occurs.

do you mean the difference between when sales happen vs when the credit card deposits come in?  actually, there are ways to deal with that that can recognize cash only when it comes into the bank in terms of cash flow.

 

as i've said, i've always reported to businesses on accrual basis.  And frankly, on the sales side, unless a lot of catering is being done, the difference between cash and accrual is neglible.  On the expense side it can be a lot.

 

I think many restaurants report to the feds on a cash basis because they are S-Corps.  If they have the ability to choose cash or accrual, i always recommend accrual.  it's so much better to see what's actually happening in those businesses.  And if you are really making money or not.  IMO