Accrual vs. cash basis accounting
Two ways to time when transactions hit your books: cash basis records money when it actually moves; accrual records it when it’s earned or incurred — and the two can tell very different stories.
What accrual vs. cash basis accounting means.
Cash basis accounting records income when money is received and expenses when they are paid; accrual basis records income when it is earned and expenses when they are incurred, whenever the cash moves. The same transactions can show a very different profit for a month depending on which basis the report uses.
IRS Publication 538 (Rev. January 2022) states both rules. Under the cash method, “you generally report income in the tax year you receive it, and deduct expenses in the tax year in which you pay the expenses.” Under an accrual method, “you generally report income in the year it is earned,” once “all events have occurred which fix your right to receive the income and you can determine the amount with reasonable accuracy.”
Why it matters which one you’re on.
Cash basis is simpler and mirrors your bank account. Accrual gives a truer picture of profitability over time, because income and costs land in the month they belong to. For tax the choice is not always free: Publication 538 says “If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales,” with an exception for small business taxpayers, and certain corporations and partnerships above a gross-receipts test generally cannot use the cash method.
QuickBooks can report on either basis from the same data, and switching the report basis changes the numbers without changing a single transaction. Getting the default basis right is part of setup and a frequent cleanup correction. The tax method, and any change to it, is your CPA’s or EA’s decision. TechBrot does not prepare or file tax returns; we work with your CPA or EA.
One month, two bases: a worked example.
Illustrative figures, not a client file.
- 01
The transactions
Take a consultant who invoices $30,000 in September: $12,000 is collected in September and $18,000 in October. September also brings $8,000 of bills, $5,000 paid in September and $3,000 in October. And $9,000 arrives in September for an August invoice.
- 02
On the accrual basis
September revenue is $30,000, invoiced and earned, and expenses are $8,000, incurred: a profit of $22,000. The balance sheet at September 30 shows $18,000 of accounts receivable and $3,000 of accounts payable.
- 03
On the cash basis
September revenue is $21,000 — the $12,000 plus the $9,000 collected for August — and expenses are $5,000 paid: a profit of $16,000. Receivables and payables do not appear, because nothing is recorded until cash moves. Same QuickBooks file, same transactions; the report’s accounting-method setting is the only difference.
How accrual vs. cash goes wrong in QuickBooks.
Reading the wrong basis
An owner reads the P&L on accrual while the tax return is prepared on cash, or the reverse, and the two never seem to agree. Every report should say which basis it is on.
Cash-basis habits in accrual books
Sales entered as bank deposits instead of invoices, and bills skipped in favor of writing checks. The file is set to accrual, but receivables and payables are empty, so the accrual reports are really cash reports.
A cash-basis balance sheet with receivables on it
A non-zero Accounts Receivable or Accounts Payable on a cash-basis balance sheet points to items posted outside the invoice and bill workflow, such as journal entries straight to those accounts.
Books on the right basis
Keeping the books correctly on your chosen basis, with reports read on the basis each decision needs, is part of monthly bookkeeping.
Accrual vs. cash basis accounting questions.
Can QuickBooks switch between cash and accrual?
Its reports can. The same transactions can be reported on either basis by changing the report’s accounting-method setting, and nothing in the books changes. Changing the method used on your tax return is a different matter, decided with your CPA or EA.
Which businesses have to use the accrual method?
For tax, IRS Publication 538 says a business that needs an inventory to account for its income must generally use accrual for purchases and sales, with an exception for small business taxpayers, and certain corporations and partnerships above a gross-receipts test generally cannot use the cash method. Which rule applies to you is confirmed with your CPA or EA.
Not sure which basis your reports are on?
A QuickBooks ProAdvisor confirms how your books are set up and whether you’re reading the right basis for the decision in front of you. Tax-method changes are confirmed with your CPA or EA.
Or send the details instead What happens after you call