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Does Your Business Use Cash or Accrual Method Accounting?

Which method does your business use and what do you think are the primary advantages for your unique situation?

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Super Contributor

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.

Frequent Contributor

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

 

Regular Contributor

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 Product 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 ><.

Regular Contributor

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.  

Community Product Host

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 ;-). 

Super Contributor

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.

 

Community Product Host

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. 

Contributor

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.