With Cash Basis Accounting, income is recorded when cash (checks, money orders, or currency) is received, and expenses are recorded when paid. However, unpaid credit sales and purchases do not show on ledgers, which can present a misleading picture of income and expenses.
Accrual Basis Accounting is where revenue and expenses are recorded in the period in which they are earned or incurred regardless of whether cash is received or disbursed in that period. This accounting basis is generally required in order to conform to GAAP in preparing financial statements for external users. This is the recommended method.
How does a Cash Basis balance sheet and income statement differ from an Accrual Basis?
A Cash Basis Balance Sheet does not include accounts payable (A/P) or accounts receivable (A/R) of any type. There is no inventory. There is no Sales Tax Payable or any other similar liability.
On the income statement, A/R is treated as income and A/P is treated as an expense. Inventory is treated as a Cost of Goods Sold.
Does Total Office Manager use the Cash or Accrual Method?
Total Office Manager uses the Accrual Method of accounting for all transactions except Sales Tax. With Sales Tax, you have the option of choosing which method you want; Cash or Accrual. We offer a Cash Basis option on Sales Tax so that you are not asked to pay sales tax for transitions that you have not collected for.
We file our income tax return using the cash basis. Will this be OK with Total Office Manager?
Yes. Absolutely. Your accountant will know how to handle this situation.
My accountant wants Cash Basis reports. How do I create them?
There is no need to. Print your balance sheet and income statement as you normally would. Your accountant will adjust these reports to a Cash Basis using the same technique described above. This is a very common practice.
Tips – Accounting Methods Part-1