Have you ever noticed that when you are run a report in QuickBooks you have the choice to run them using either accrual or cash basis? If so have you wondered why QuickBooks offers these two different methods and how they’re different?
You might recall that when you first spoke with your CPA about your business and its taxes they asked you whether your books were accrual or cash. These are the two accounting methods which a business can keep its records and quite simply, the accrual basis reports on sales and expenses when they are earned or spent (incurred) while the cash basis reports on sales and expenses when the cash comes in or goes out the door. The nice thing about QuickBooks is that it allows you to run your reports either way. So with an educated eye, you can see the difference and you can run reports using either method to get different perspectives on your business’s results without changing your method of accounting. It is worth noting here that there are strict tax rules related to changing your method of accounting, so never don’t change your tax reporting method without first talking to your tax preparer. This being said, you can run your business’s reports using either method and as long as you understand how each method reports the numbers, you will have no problem.
As mentioned, when you run reports using the cash basis, any inflows or outflows that have not yet impacted your bank balances will not be included. So the two biggest differences will be where you have unpaid vendor invoices for expenses in accounts payable or customer invoices for sales in accounts receivable. Using the accrual method, all sales/expenses will be included, paid or not, as will the offsetting AR/AP balances. If you are using the cash basis for reporting, QuickBooks will exclude all unpaid invoices and bills for sales and expenses from your reports meaning both sales and expenses will be lower than they would be with the accrual method same goes with the AR/AP balances.
If you get confused or want to see more details about how they differ, remember to run the Statement of Cash Flows and this report will help you really see the difference since it identifies sources and uses of cash that are not reported in your Profit and Loss Statement. For a business owner, the Statement of Cash Flows is perhaps your most important reporting tool so I in the next few weeks I will spend more time going over how to read it and what it means to you.
As always, please feel free to post any related questions or contact me at www.TheSharedFinanceCenter.com