How to transition your business to the accrual basis of accounting

Switching to accrual accounting can feel like a big leap, especially for small business owners who are used to the cash basis. 

Yet the accrual method offers clearer financial insights by recording income and expenses when they’re earned or incurred, not when cash changes hands.

This guide provides South African businesses with a practical roadmap for making the transition, focusing on the benefits of greater financial transparency and accuracy.

What is the accrual basis of accounting?

The accrual basis of accounting records transactions (revenues and expenses) when they happen, regardless of when payment is made. 

And, so what is the difference between cash basis and accrual basis of accounting?

In cash accounting, you only record transactions once money is exchanged. 

For example, let’s say you deliver goods to a client in March, but you don’t receive payment until April. Accrual accounting recognises the income in March—the moment you deliver the product or service, instead of waiting to receive the payment. 

In South Africa, switching to this accrual method can offer better financial clarity. Let’s examine those benefits a little more closely.

Advantages of accrual basis accounting​

We’ve outlined the meaning of the accrual basis of accounting, but what about its benefits to business owners? ​Here’s why it's worth putting in the effort to step away from cash accounting:

• Improved financial clarity: Recording income and expenses when they happen means you can see all revenue earned and costs incurred in the same period. This gives a more complete picture of your business’s financial health than waiting for cash to ‘appear’ once it changes hands. By including outstanding payments and bills in the accrual method, you get a better sense of your real financial position. As a result, you’re in a better position to plan and make growth decisions.
• Better matching of revenues and expenses: Accrual accounting matches income to the expenses incurred to generate it. This is called the matching principle. For example, if you make a sale in December but pay for the materials in November, both the revenue and related costs should be recorded in December. This ensures that financial statements accurately reflect profits for a given period, giving a clearer understanding of a company’s performance.
• Compliance with local regulations: South African tax laws often favour accrual accounting for larger businesses, ensuring you meet financial reporting standards. This is a general standard around the world, especially as businesses get larger and their financial documents become more complex. 

QuickBooks simplifies this transition by offering tools that help manage your finances. You can benefit from various automated features tailored to accrual accounting that make this transition smoother for you. This includes automated invoicing and tracking, as well as reporting features to provide you with a clear picture of your finances. 

Step-by-step guide to transitioning to accrual accounting

You needn’t fret about the switch. Follow these steps to navigate the process:

Evaluate your current accounting system

Start by reviewing how your business currently tracks income and expenses. Look for any gaps or inaccuracies in your cash-based system, such as missing invoices or payments that were not recorded when incurred. Identifying these issues early will ensure a smooth transition to accrual accounting, where accuracy is crucial since income and expenses are recorded when they’re earned or incurred, not when money changes hands.

Adjust entries for outstanding receivables and payables

To switch effectively, ensure all outstanding invoices (receivables) and bills (payables) are accounted for. This means adjusting your entries so that you capture any income earned and expenses incurred but not yet paid. Doing this ensures your financial records reflect your actual financial position and prevents discrepancies during the transition.

Set up your accounting software for accrual accounting

With QuickBooks, we simplify the switch to accrual accounting. Once you update your settings to record transactions on an accrual basis, the software tracks everything in real time. QuickBooks even offers support to guide you step by step through the transition. Make sure to update your historical data for consistency, ensuring accurate reporting moving forward.

Challenges to expect during the transition

We understand that switching up your accounting systems can feel like an intimidating step. And in truth, it can present a couple of challenges:

• Learning curve: Change is always challenging since it comes with a learning curve. Adjusting to a new system takes time. Thankfully, QuickBooks’ user-friendly interface and comprehensive support system make the ride a little smoother. 
• Managing cash flow: Accrual accounting reflects transactions when they occur, not when cash is exchanged. This may require a new approach to tracking your business’s cash flow. Again, QuickBooks can help you overcome these challenges. You can rely on real-time tracking and easy-to-use reports that give you better insight into both accrual and cash flow figures

How QuickBooks can help simplify the transition

QuickBooks features are designed to make the transition to accrual accounting more straightforward. We’ve signposted a few of these for you already. Let’s unpack those features more thoroughly to give you a better idea of the benefits they deliver. 

• Real-time financial tracking: QuickBooks lets you monitor your cash flow and expenses as they happen. For example, if you're unsure whether you can afford a new piece of equipment, real-time tracking gives you an up-to-date view of your financial health, letting you make that decision with more confidence.
• Automated invoicing and payments: By automating invoicing, you reduce the risk of late payments from clients. A small business owner who juggles multiple clients can save hours and improve cash flow by automating these repetitive tasks.
• Straightforward reporting: With just a few clicks, QuickBooks generates detailed financial reports. When preparing for tax season or applying for a loan, you’ll have accurate profit-and-loss statements ready in minutes, ensuring compliance and reducing stress for you come tax time.

Final thoughts on accrual vs. cash basis accounting

You’ll find some articles laying out some benefits of cash accounting. However, the general consensus is that the preferred method for businesses that want to grow is accrual accounting

Switching to accrual accounting provides long-term benefits by improving financial accuracy and decision-making as your financial documents become more complex. Accrual accounting also puts you in a better place related to compliance when it comes to filing your taxes with SARS.

By using QuickBooks, the transition becomes much easier, helping your business stay on top of its finances and fully compliant. Ready to switch? Start using QuickBooks to manage your accounting processes today.