Cash vs. Accrual

Cash vs. Accrual

Often times business owners or new bookkeepers are confused about the differences of reporting on a cash basis vs. and accrual basis.

The CASH METHOD is a popular choice for small business due to its simplicity.  Think of it as actual money in and money out.  To determine gross income, add up the cash, checks, and fair market value of property and services you received during the year. Then add up all the money you spent on allowable deductible expenses that you actually paid for during your tax year.

With the ACCRUAL METHOD income is reported in the year in which it was earned even if the income may be received in a different tax year. Likewise you may deduct all expenses incurred during the tax year even if you do not pay for them during that tax year.

There are four types of taxpayers that cannot use the cash basis: (1) corporations with over $5,000,000 in gross receipts; (2) partnerships with at least one C corporation partner; (3) tax shelters; and (4) taxpayers required to keep inventory (retail, wholesale, manufacturer etc...) Exceptions (1) Farming Businesses (2) Qualified PSC's (3) Entities with gross receipts of not more than $7,000,000.

QuickBooks allows you to set a preference for your accounting method so your reports will automatically generate based on that preference. To set this preference (in QuickBooks desktop version) go to Edit>Preferences>Reports and Graphs, choose the company tab and there select either cash or accrual. Even though you may have set the preference for "Cash" there may still be times you may want to view a report on an "Accrual" basis.  Once you have the report on the screen you can easily change the report view and not change the default, by clicking Customize Report and selecting Accrual.

For more information on cash vs. accrual consult your accountant or see Publication 538 at irs.gov. 
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