Cash Basis or Accrual Basis Accounting

In cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when cash is disbursed. There are no accounts payable and accounts receivable.

In accrual basis accounting, revenue is recorded when the customer is invoiced. Expenses are recorded when the invoice from the vendor is entered. In accrual basis accounting, the invoice date and purchase date are the key dates.

For financial management, accrual basis accounting is the only accounting method that makes sense. Cash basis accounting ignores accounts receivable and accounts payable. With cash basis accounting you could have a million dollars in the bank and have two million in accounts payable. Your balance sheet would show a million dollars in assets and no liabilities.That does not provide an accurate picture of the health of your company. For tax purposes, cash basis accounting can be an advantage. If you have no money in the bank and have receivables of a million dollars, you would pay tax on the money you have received instead of the million dollars you expect to receive. If you have a lot of accounts payable, there can be a tax advantage for reporting on an accrual basis. IRS regulations and your historic reporting will determine how you report your income. If you have inventory, you are required to report on an accrual basis. Uncle Sam does not like the idea of you increasing the value of your company by buying inventory and not paying taxes on it.

If you report to the IRS on an accrual basis, there is no advantage to running cash basis accounting. If you report on a cash basis, you should run both cash and accrual accounting.

To add cash basis accounting, you will need to go to Setup>Options>System Environment and check the Cash Basis General Ledger Box. You will run the cash basis accounting separately from the accrual basis accounting. The only significant additional time required will be creating the beginning balances when you first start using the system.