Know the difference between Cash and accrual in QuickBooks to use the suitable one when required saving time and enhancing productivity.
Understanding the difference between cash and accrual in QuickBooks Desktop
It is very important to understand that what is the difference between cash and accrual methods if you are using QuickBooks for your business. No matter whether you are taking care of the financial reporting by yourself or not, it is of great importance to know how each method works. It will help you to select the best practices of bookkeeping for your business to flourish.
What does the Cash Method stand for?
The cash basis method allows you to get the income recorded in the form it is received and the expenses in the form they are paid. Accounts payable or receivable are not counted here, because it applies only to the payment which is made by the clients, during cash in hand, and the expenses when transactions get clear from your bank account of yours.
If we go with an example, then consider that if a client is invoiced for $2,000, dated March 1, and payment is received on 15th April then the income will be recorded in the bookkeeping of April as this is the time when money was received, that too in hand.
Most of the owners of small businesses prefer the cash method for accounting, as this method is one of the simplified processes of bookkeeping. Money could be tracked easily because it keeps on moving out and into your bank account and this is the cause why the recording of payables and receivables is not needed.
Also, the small business does not have to pay the income taxes incurred on any of the revenue, till the time it is deposited in your bank account.
There is a drawback too of using the cash-based method of accounting because it can sometimes create an inaccurate or wrong picture of your overall finances yours. As it does not account for overall outgoing expense and incoming revenue, hence you may lead to thinking that the cash flow of the month is very high, when in reality that will be the result of the work done last month.
Meaning of Accrual Accounting
Accounting done on an accrual basis is opposite to what is done in the cash method. Expenses and income get recorded when they are either earned or billed, irrespective of the money that was received. If we use the same example as we quoted above then by applying the accounting of accrual basis, say you will record $2,000 as the income in the March month’s bookkeeping versus in April, when the funds were received by you.
By using the accrual method, the owner of a small business will be able to get a realistic and better idea of the expenses and income during that certain period. By doing this, you will be able to get a better and clearer idea of how your business is going and where it can head in the future.
One problem with the accrual method is that funds or cash flow are not accounted for by it, which are available in your bank account. If bookkeeping is not done by you properly and the practices you follow for it are not appropriate then chances are that the accrual-based method of accounting can prove to be financially bad for the owners of small businesses, because large revenue will be reflected through your books, whereas the bank account you own will be empty completely.
Which method suits the best Small Businesses
Now let’s just have a small comparison between which method is best for the small business.
The method of cash accounting is comparatively easy if we do the comparison between the two because it is straightforward and does not involve any complexities. Whereas in the accrual method, you have to do more bookkeeping as you have to anyhow do more tracking and recording.
If you own a small business then you can choose any method out of the two, as long as the sales do not exceed $5 million in a year. If in case, you keep an inventory of the merchandise with the intent to sell it to your consumers then the accrual method should be used by you.
Cash methods allow you to have a better and clearer picture of the funds that are in the bank account, whereas the accrual method will help you to keep the account of the money that hasn’t come yet. With a cash basis, you can immediately have a look at the financial picture of your business, and the accrual method, on the other hand, helps to have a long-term view.
The hybrid method can also be chosen by some businesses for accounting purposes. They use the accrual-based accounting method for the inventory and use the cash method for the expense and income.
Issues faced by the Users
If you are confused and unable to decide which method you should opt for, which is quite common then without thinking twice just dial our smbaccountants.com and talk to our QuickBooks helpdesk. SMB QuickBooks tech team will ensure that your issues and queries are answered timely.
+1-800-961-4963