Accrual Accounting or Cash, Which Is Better?

The Answer to the Great Debate

By Mark Johnson
Originally posted: Aug 10, 2010
 

I am often asked this question by business owners who use Quickbooks and are not sure which is better — the cash or accrual accounting for reporting their business results.

The general rule is that cash basis accounting is simpler to understand and is consistent with most taxpayers’ income tax filings.  However, as businesses grow and their operations become more complex, such as with more customer accounts receivable and vendor payables, the accrual method is preferable.

The accrual method more accurately reflects the company’s revenues and expenses as incurred rather than when paid or received in cash.

I recommend that my clients use the accrual accounting for the simple fact that it more thoroughly shows the amounts owed to vendors and the expected revenues earned in the business.  If you are using Quickbooks, it is simple enough to maintain the ledger in the accrual basis with the accounts receivable and payable recorded. And, if needed, you can report on the cash basis by selecting the cash option when displaying a report.

In most situations, the cash reporting method is of value only to the tax accountant and the IRS. Therefore, the use of the accrual method in Quickbooks will satisfy all of one’s business needs while still allows the flexibility required to satisfy the tax return at year end.

The main challenge with the accrual method is that at the end of an accounting period all economic transactions are to be recorded, regardless of whether any cash has been involved.  Thus, an accountant may need to make journal entries for obligations entered into by contract or agreement where the cash has not yet been paid. Still, the benefits of the accrual accounting highly outweigh this small hindrance.

 

For assistance with accrual accounting, contact your CFO, CPA or accounting professional.

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