cash v accrual

Hi there, Linda Artesani, Artesani Bookkeeping. It's a cruel, cruel world. I'm sorry, I'm not the greatest actress, but I wanted to talk about cash-based books and accrual-based books because it's, it's something that people get confused upon. Have you ever asked your customer, how do you base your books, cash-based or accrual? And they give you that glazed-over look and they're like, I don't have a clue. No one's ever asked me that question before. So a little ProAdvisor tip on that. If you're doing a cleanup on someone's account, someone's books, or you're doing work like that. I always tie— always request the tax return, the last good tax return, and always tie the books back to the tax return. You're going to know right away if their books are cash or accrual. Most of the businesses I work with, they base their books on their cash basis. So they started out as a small business. They don't have any inventory or they don't have sales over $5 million. Those are the reasons that you would be more accrual-based. They are also not a C corp. I work mostly with S corps or LLCs or sole proprietorships. So those tend to be more cash basis. So typically, there's just the 2— there's cash basis and accrual. Cash basis books, the most simple to understand. So I think the best way to think about it is money in, money out. You log into your bank account, you look at the bottom line, how much money do I have in my bank account today? That's the, that's the method behind cash basis. And that's not necessarily cash basis when you're talking logging into your bank's website, but you get the picture. That's the amount of money I have in my bank account. So it's an easy, simple way to recognize your books. Cash basis bookkeeping is if you have invoices, it shows only paid invoices. So it's only the ones that you've received your revenue on, your money on, that are going to be applicable at tax time. So if you have a pile of invoices The paid ones are the ones that are going to show on cash-based books. Same thing with your bills. So if you have a lot of bills, the ones that are paid are going to be reflected in the money out, right? That's your money out. With accrual-based, it's based on the invoices. So you might have a lot of open AR. That's all inclusive of the income for the, for the business. All the bills are going to be inclusive of on your records for accrual-based. Accrual-based bookkeeping to me is real-time booking— bookkeeping. It is the— what your business is, how your business is doing, the health of the business, taking the temperature of the business. So a lot of times what happens is accountants will leave the bookkeeping in QuickBooks, which is an accrual-based type of system. It'll leave the books as accrual-based, so they run their reports all year long accrual-based so they can see the real how their business is doing. And then at year end, we make a memorized grouping of the financial statements, the GL, the things the CPA or your tax professional will be asking for, the balance sheet, the profit and loss, and any other supporting records. We'll put them together as cash basis because that's what the CPA needs to make— to do the tax return. But for the business owner, they want to see like how many people, you know, how's my accounts receivable, how's my accounts payable? They really want to look at the records in that way. So there's a couple little quirkiness— there's a little quirkiness revolved around your— when you look at books cash basis or accrual on the records in QuickBooks, there's a little bit of— there's a couple of accounts that you'll need to address: unapplied cash payment income and unapplied bill payment expense. Those are 2 QuickBooks accounts that will show up on the records in QuickBooks Online only, not Desktop. And they're going to show up, and those are going to be when you have an invoice that postdates an invoice payment or a bill payment that predates the bill. So when those types of transactions happen, you can't receive a payment on an invoice if you've not sent the invoice, right? So when those happen, you'll see monies in those accounts. So let me take you to QuickBooks and I will show you How that happens. So here we are in my sample company called Law Firm, and I'm going to be putting it out there. I need someone to give me a name for my law firm, something cute and quirky, and that just because Law Firm's just not working on these videos. It's kind of confusing. So here's my company called Law Firm, and these books here I will show you are accruals. So this is real time. You're going to see all the invoices, the paid and the unpaid, reflected in my legal services or my total income account number. And the same for the expenses. If I come down to the expenses, this expenses here, you're going to see everything in here paid or unpaid. That's how it will be shown in here. So if I just can click on Jake Thomas, as you can see, it's not paid. It says receive payment here. It's not paid. So if that's going to show in my books as Income. I haven't received the money yet. I've worked and earned the revenue, but I've not received the money. So that's something that you're going to see in law firms that are— or any books that are— people do a lot of invoicing. I'm working with an attorney right now that has— she does a ton of invoicing. It's not anything to do with the trust, but she does a lot of invoicing. She used to track her AR. She's using Invoice Sherpa and some things to track people who aren't paying and kind of send out that automated invoice invoicing, automated statement sending to remind people to pay. So Jake hasn't paid me, but his, his invoice is included in this total here on my report. Let's go to Cash Basis. So I'm just going to hit Run Report here and show you that Jake is no longer here. So his invoice was 9/20. And you can see here, he's gone. There's no $1,999 invoice. Not reflected here. The, the total balance down here for the total income is a lot less. This is an account that populates when you have the invoices and the payments not dated right. So like I said before, if you have an invoice and you have a payment, that's the order. The invoice starts— comes first, payment comes second. Same thing with the bill. You have a bill and a bill payment. They don't go in the opposite direction. You don't receive the money. That would be a deposit. And, and then you'd apply it. So that's the right way to do the books. And this account here is what will show up if you've got things not dated right. So let's take one here. I've got Suzanne Keir. She has an invoice on 9/30, and then I have her payment here on 9/9. So there's no way she paid my invoice of 9/30 on 9/9. The way to fix it is open up Suzanne Keir's invoice, change the date of the invoice to at least 9/9. Save it. Yes. Click out of it. It's going to reapply the payment. I'm going to click out of it. And now she's off that list. So it's as simple as that. So again, I hope that's helpful in explaining cash basis versus accrual. I know that a lot of people struggle with it. It is a different account and it is a different way of doing the accounting. Accrual basis is the only one that follows generally Acceptable Accounting Principles, the GAAP method, that's only in accrual-based books. There's no cash books for that. If you are a business that's looking to maybe get a loan and you have a lot of— you have a lot of receivables on the books, I mean, it's harder to get a loan with the bank if you're cash-based and you've got these receivables you haven't been paid for. So that's why the real-time books are going to show a different account, a different profit and loss number at the bottom line. It'll show more if you haven't been paid, but you've invoiced it out. So it's something to think about when you select whether you're going to be cash basis or accrual. When you're sitting with your CPA or your tax professional and you're just starting a business, it's an important decision to make. Most businesses just go by cash because it makes sense, especially when you're starting out. You don't have a lot of cash. You want to pay on what you've earned, what you've received, and what you've spent. So that's why people pick it. And again, there's some rules around it. If you've got more than $5 million in sales, you can't have cash-based books. And again, inventory is another— it's not allowed if you've got any inventory on your books or if you're a C corp. So that's my video for this week. It's kind of short but to the point. Best way to— best practices, if you ask your client, I've asked them over the years and most of them just kind of glaze over and they don't know what their books are. So I just ask for the tax return and tie the books back to it. Anyway, it's one of the steps we do when we do our books with a new client. We make sure, and even ongoing clients, we just tie the books to the tax return. That's just an important step. As an accountant, you need to know how to do that. Maybe we'll get into that in another video. But all right, thank you for watching. I hope you have a wonderful weekend and— or week, and we'll see you on the next video. Bye.