17 Nov Cash vs. Accrual Method of Accounting
Cash versus Accrual Methods of Accounting
Definition
Cash basis is a method of recording income as it is received and expenses as they are paid. Many service businesses use this method for tax purposes. In QuickBooks this is usually achieved through simply entering checks and deposits, either on the forms, or directly into the register. Using this approach, it is not possible to generate accrual basis statements from the transactional data that has been entered.
Accrual basis is a method of recording revenue as it is earned (regardless of when it is actually received) and expenses are recorded as incurred (regardless of when it is actually paid). Most businesses that carry inventory are required to use the accrual basis of accounting. For management purposes the accrual method is usually preferable due to the fact that it matches the revenue and expenses in the same period regardless of when they were paid. The discussion of the IRS rules of keeping books on an accrual basis requires that the tax payer report earnings and expenses on the accrual basis are beyond the scope of this discussion. For purposes of this discussion, it is assumed that Accounts Receivable and Accounts Payable transactions are enter for management purposes, but the financial statements (or tax returns) are to be prepared on the cash basis.