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The Additional Cost of Accrual Accounting

14 May 2019 10:01 PM | Mark Madeley (Administrator)

Does switching from cash basis to accrual basis for recognizing your company's profit have a hidden cost in your own accounting department?

On first reflection, It wouldn't seem so. But it does.

On first reflection you wouldn't expect a difference. There are no changes to be made inside your accounting system. For example, QuickBooks products can report on both cash basis and accrual basis simultaneously. It's only a matter of adjusting your reporting preferences or customizing individual reports on the fly.

And if you are already using invoices in QuickBooks, as long as you date the invoice correctly (instead of using the date you receive payment!) then you are doing all that is necessary from the revenue side.

But what about expenses?

Many business owners simply write checks from QuickBooks to pay their vendors when they are due, or they may set up an autopayment method with a bank account or credit card to pay their vendors. However, those are cash basis results.

To show accrual basis, you will need to enter a payable (called a "Bill") in QuickBooks, likely dated the earliest date the expense is incurred and often the date the bill is received. For example, if you receive a utility bill with a closing date of the 10th that is due on the 5th of the next month, the expense is incurred on the 10th for accrual basis, even though your autopayment triggers the next month.

Also, paying the bill in QuickBooks is not done from the "Write Checks" menu but from the "Pay Bills" option under the Vendors menu item. You may also need to select multiple bills to pay at one time and enter and apply credits from your vendor, too. You must also stay on top of your Accounts Payable reports to be sure all your vendor balances are accurate. So you can see how the effort, time, and expense start to build up.

Most businesses stay cash basis until tax reporting requirements force a change or their CPA offers a significant reason to do so. But it can be helpful for a cash basis business to know how it's doing on an accrual basis as well. Why?

Using accrual basis reports, you can better compare revenues and expenses related to the same project or phase of a project. And when you are managing different timing of payments from your customers (e.g. slow) versus when you need to pay your key vendors (e.g. not so slow), accrual basis reports will give you insight into cash demands and can be used for forecasting, planning credit terms with customers and vendors as well as setting up a bank line of credit or considering the value of factoring.

It's never helpful to make things more complicated than necessary. If you are consider the move to accrual basis or want to get a better handle on project costs and cash flow, I can help you set up what you need in QuickBooks based on your specific concerns -- without putting you into a bog of numbers or processes that cost more than the value they produce.

Any other concerns about your accounting, inventory, payroll, reporting, or something else financial? Please let me know. 

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