Cash Basis vs. Accrual Basis Accounting Explained: Which Is Right for Your Business?

[@JoeSpivey2]

Great advice from a very knowledgeable source. I really appreciate your input.

[@ccafKhmer]

Thank you very much! We are using Cash basis

[@ClaraCFO]

Great! Me too :)

[@stephenreeves9403]

Thanks Hannah, that's useful - helped cement my vague understanding of this. for a quartrely bill, power say, you would account for 1/3 of the expected bill each month and then, when the bills come in, allocater the real cost against each month. does that sound about right? Thank you.

[@babsoneverything3060]

Thank you! I have been a bookkeeper for several years, and I never fully understood this.

[@ClaraCFO]

Glad it was helpful!

[@Secretname206]

Thank you. It was helpful!

[@HectorGarciaCPA]

Great content!

[@ClaraCFO]

Thanks Hector!

[@AljaneCatesio]

Thanks for this! Started learning how to do bookkeeping for our company. Just one question, how do you record a contract total cost (consulting firm) payable by the client in 2 milestones in cash basis acctg.? Do I only record it as revenue the moment we receive their payment per milestone? Meaning the transactions that will only appear under that "client" are the 2 revenue transactions? Thank youuuu.

[@ClaraCFO]

Yes - you got it. You will invoice the client for those milestones when it is time and revenue is recorded when the client PAYS!

[@MarkPlassmeyer]

If a small business uses the accrual method, how important is it to accrue monthly utility costs? For example, the January 15th to February 14th electric bill is $100, the February 15th to March 14th electric bill is $115, etc. If the business is only concerned about year-end financials, is it only really necessary to accrue electric bill expenses at year-end, or should they still be estimated and accrued monthly?

[@ClaraCFO]

If the only outside party using the financials on an accrual basis is the IRS at the year-end, I would only worry about doing accrual adjustments as of 12/31. So I wouldn't bother with monthly accrual entries for utilities - especially since they stay basically the same throughout the year. For small business owners not having to produce financial statements according to GAAP (generally accepted accounting principles) - you just need to think about making the financials correct enough for management and also correct for reporting taxes (which just means they need to be adjusted for accruals at the end of the year).

[@salmannawaz9969]

IRS wants us to report a revenue even if we thought about it. what happens if the earned revenue did not happen in coming months , or the very next month for some reason, we reported it IRS but it didn't came may be we got scammed, the company went on crises where the earned avenue was expected . Now do we have to pay to the IRS as well because it is recorded?

[@RickyCHSWindowCleaning]

How would this work for payroll? Work performed in May but paid out in June

[@ClaraCFO]

Yes, so if you are accrual-based, you would record an accrual JE to book the labor expense in May. But if you are cash basis, you would just record the expense when the payroll is paid!

[@RickyCHSWindowCleaning]

@@ClaraCFO Ah, got it. I run all my books on a cash basis because I am a smaller company and its easier for me. But I love the concept of accrual so I can have more accurate stats of my business. Any suggestions on how I can report with cash and analyze my financials internally with accrual? I just use quickbooks online right now..

[@geminigenius23]

Excellent Teacher

[@ClaraCFO]

Thank you! 😃

[@bravo86831]

I just took bookkeeping classes and I’m still learning everything but in my bookkeeping training it said that pretty much all businesses should be accrual that we should bookkeep every account that way and to not let anyone run cash. Now I’m confused . lol but that you for a second opinion

[@ClaraCFO]

I disagree. Most small businesses run on a cash basis and an accrual based approach would be too time consuming and costly for most small businesses to upkeep! Most small businesses under a few million dollars will run on cash, but it may make sense to do accrual before that time comes.

[@sungtube7055]

If you consider about tax expenses when you run a small business, you will understand that you don't want to pay tax on the next year cash revenue by booking sales on December. Overall cash basis does not give you good financial performance but sometimes cash basis helps not to pay unearned cash.

[@RohitSharma-mn7he]

Thanks ❤

[@ClaraCFO]

You're welcome 😊