Cash or accrual
method is best
for taxes and for managing your business.
with a QuickBooks advisor
Using the cash basis method of accounting / bookkeeping, income is reported in the year it is received and expenses are
generally deducted in the year they are paid
basis accounting reports will count sales as of the invoice date and count expenses
as of the date the goods or services were received read
How to generate
accurate accrual financial reports in QuickBooks.
QuickBooks to will produce both cash and accrual basis reports.
But set your default to accrual.
Unless you choose to pay your vendor bills as soon as they arrive in
your mailbox AND you sell items for cash, check or credit card
(carry zero accounts receivable) you should set QuickBooks to
produce accrual basis reports. To change a particular
report from accrual to cash (or cash to accrual)
Run the report >
from the button bar (report is displayed on your screen) click on
the modify button > the display tab has a radial button to choose
cash or accrual - select the desired basis and click OK.
To change the default report method to accrual basis or cash basis reports:
- Go to the edit Menu
- Select preferences
- Click on the reports & graphs icon in the left menu bar.
- Click on the company preferences tab
- Click on your preference Accrual or Cash
What is Accrual Basis?
basis reports will count sales as of the invoice date and count expenses
as of the date the goods or services were received
When you match the sales with those expenses that were incurred to
generate sales (accrual basis bookkeeping ), you get
a true picture of business performance. To achieve
this matching of
sales and expenses in QuickBooks, the date of the transaction must
agree to the date the service was rendered or the date the product
was sold. Read
about one QuickBooks procedure that will result in this
matching of revenue and expenses
To best manage your business, use accrual reports. If you
are a cash basis taxpayer, you can print the cash basis reports at
any time and use for generating your business tax returns.
Not all businesses may use the cash basis on
their tax returns. There are some restrictions as to which
businesses may qualify:
Cash basis reports will provide the reader with a
history of cash inflow and outflow. For cash basis taxpayers (no
taxes are due until you have received payment from customers), cash
basis statements will report the income that will be taxed .
Cash basis reports do not give you a clear understanding of how
productive (efficient) you are in generating profits.
Cash reports are easily generated when the QuickBooks default
report basis is accrual. Simply run the report within QuickBooks and
click on the modify button. The display tab provides a radial
button to select either the cash basis or accrual basis. Every
QuickBooks report prints in the top left corner the date the
report was run and the basis used to create the report..
In order to be acceptable for income tax
purposes, a taxpayer's method of accounting must clearly reflect its
2001 Small business exception:
Businesses with average annual gross receipts of $1
million or less can use the cash method even if they mine,
manufacture, or are in the wholesale or retail trade, or
information industries. Read on to see what your choices
are if your sales are over $1 Million. Qualifying businesses can choose not to maintain inventories, even
if they do not switch to the cash method. If a business chooses not
to keep an inventory, it deducts the cost of items in the later of
the year they are sold or the year they are paid for [Rev. Proc.
Under the cash method,
income is reported in the year it is received and expenses are
generally deducted in the year they are paid. On a
month to month basis, sales are counted when collected and expenses
are deducted when paid. However, prepaid
expenses must generally be deducted in the year to which the payment
applies [Reg. Sec. 1.461-1(a)(2)]. You may set QuickBooks to report
on the cash method from the preference menu.
Edit>preferences>reports &graphs>company preference tab
Under the accrual method, income is reported in the year it is earned regardless
of when payment was received. Expenses are deducted in
the year that the liability was established, the amount is
ascertainable, and services were rendered or product received [IRC
Sec. 461(h)]. There are special rules that exist for
various types of income and expenses so be sure to consult with your
tax advisor. This method provides valuable management data
therefore we recommend to set the default QuickBooks report to
accrual under the edit>preference window. You can still obtain cash
basis reports by running a report and from the modify button >
display tab, choose cash basis.
The accrual method generally is mandatory for businesses who must
maintain an inventory to conduct business. There are exceptions
(ie: can use cash method) for qualifying
small business for businesses with sales under $1 million.
Qualifying small businesses with 3 year average gross
receipts of under $10 million may select the cash method (
Click here to see revenue procedure 2002-28 describing which
businesses with revenue under $10 million qualify for cash basis). To
qualify the prior year income may not be derived from mining, manufacturing, wholesale trade, retail
trade, or information industries business ( if so then accrual is
Also C corporations and partnerships having a C corporation
as a partner and also tax shelters can't use the cash method and must
instead use the accrual method. There are special exceptions that
apply to farming corporations, and, this rule doesn't apply to a
corporation or partnership (assuming it's not a tax shelter) if a
not-more-than-$5 million average annual gross receipts test is met
and do not conduct one of the prohibited business activities
mentioned in the above paragraph.
For businesses under $10,000,000 in sales , and
required to use the accrual method may as an alternative select the
a hybrid method of both accrual and cash as long as the accrual is
used to account for sales, purchases and inventory items. Use the cash method to account for other income
and deductions [Reg. 1. 446-1(c)(2)].
This article is provided to help gain an
understanding of basic accounting/tax concepts. Always check
with your tax advisor to determine how your business falls into the
exceptions and regulations that exist for your business.
QuickBooks procedures to produce accrual reports:
Read the following
guidelines for the concepts. Focus on how the date of the
transactions affects your monthly reports -then - decide how
important monthly financials are to your business. If
comparing financials from one month to the next will improve future
performance, then you will need to spend the time learning about
journal entries. Also, if your business sales fluctuate
greatly from month to month, you may need these reports to identify
trends that will red flag business problems.
If you can live with reports that are
run for year to date or project to date figures (not
month to month), you will save time and energy and there will
be no need to put on your accountant's hat in order to prepare journal
entries or learn debits and credits. It will be wise to
run financial reports year to date for this year and compare
the numbers on the year to date report for the prior year.
Quarterly, you might have your
accountant provide you with the journal entries and reversing
entries that will keep your books tidy and accurate.
building accrual based financial reports
For the following transaction types will
the sale and expense when:
Cash Basis Reports
||Date of invoice
||Date of receive payment
||Date of invoice
Date of receive payment transaction*
|Deposit (when no invoice
or statement charge was entered)
||Date of deposit
||Date of deposit
|Enter Bill/Credit Bill
||Date of bill/bill credit
||Date bill was paid
|Credit Card Charge
||Date of credit card
||Date of credit card
||Date of check
||Date of check
||Date of journal entry
||Date of journal entry
||Date of entry
||Date of entry
* Credits on A/R and A/P MUST be linked to invoices/bills for your
cash basis reports in QuickBooks to report ACCURATE cash basis
reports can be imported into your QuickBooks File to answer the
question why does Accounts Receivable or Accounts Payable show
up on my cash basis balance sheet
|Click to save the file to your
desktop. Open QuickBooks > Reports menu > Memorized Reports >
Memorized Reports List > click on the Memorized Reports in the
lower left and select import > Navigate to the downloaded report
and click OK to import.
These reports are valid as of today, they do not look back in
time, so be sure to run as of
12/31/year end after you have received your last payment and
before you post new invoices , and after you have paid your last
bill and before you enter new bills.
accrual reports, your goal is to match the revenue with the
expense incurred to generate the revenue:
- Use either an invoice, statement charge or journal entry to
record your sale if you sell to your customer on terms.
date should be the date the service was performed or the date the
product was sold.
- Use 'enter bills' to record expenses that have been incurred
but are to be paid at a later date. Be sure to enter the date
of the bill using the date on the vendor invoice.
Use 'pay bills' to pay 'enter bill' transactions (not write
- You can use a 'write check' transaction for vendors bills that are paid as
soon as the bill is received as long as the payment is made in
the same month the service or product is provided.
If the expense is for service sold or
products delivered in the prior month, use an 'enter bills'
transaction to record the expense and date the transaction
using the vendor's bill date and pay the bill currently using
- At the end of each month. Finish invoicing your customers
for the month. If you are unable to complete this task then
you should estimate the amount of the underbillings and enter a
journal entry using the last day of the month as a date.
Debit an asset account called "Asset -Accrued Income".
Credit new income account called "Sales -Accrued
- If you prepare a journal entry for accrued income, on the first day of the following month, do the
exact same entry in reverse. Why? because during this
following month, you will catch up on your invoicing and you do
not want to double count the sale!
- Want to forget about journal entries? Get the invoicing done. Its okay
to date the invoices as of the last day of the prior month even
though it took you until the 10th of the following month to
- At the end of the month finish entering the vendor bills. In
fact, as the bills trickle in during the following month,
carefully record the bill date using the date on the vendor bill
even if it is in the prior month Don't forget to book the American
Express bill or the merchant credit card charges using
the date the service was received.
- What do you do if the vendor hasn't billed you (they are
behind in their invoicing) and you have
received the service or goods? Call the vendor ask for a
bill, or ask what the amount will be and record the amount using
an enter bill transaction and date the transaction
using the last day of the month the service
was received. For an vendor bill number, enter
the word "estimated". When you receive the actual bill, use
a new bill to record any difference between the estimated and the
final amount billed.This adjustment will
use a current date. If the new
bill is less than the estimated, use a bill credit transaction
using today's date.
- What about wages? You pay every 2 weeks and the last 10 days
of the month will be paid next month? At the end of the
month you may want to do a
journal entry to accrue the unpaid labor expense
if it is significant and reverse the
expense on the first day of the following month. Debit the
payroll expense account and credit a current liability
account called "accrued expenses". QuickBooks
Premier will prepare reversing journal entries for you
automatically. You can upgrade to QuickBooks premier
- Prepaid expenses when significant in value should be
categorized as a current asset. For example, A liability
insurance bill for the next 6 months is due today. Categorize this
bill to a "current asset" type account called Prepaid
insurance. Then, set up a journal entry (JE) to credit
prepaid insurance for 1/6 of the amount and debit insurance
expense for 1/6 of the amount. Do not enter (save) the JE ,
but memorize, by pressing control + M , in the popup window set
the Journal entry to enter once per month for 6 months starting
tomorrow. After you memorize the JE (x) or cancel out of it.
Do not enter. When you open QuickBooks tomorrow and on the
next 5 months specified date, Quickbooks will ask you if it is ok
to enter the memorized transaction, click yes. The
memorized transaction list can be found at the bottom of the List
menu. For the more advanced accounting person who
require both cash basis and accrual basis reports, set up the
prepaid expenses as an Accounts Receivable type of chart of
account, they will then disappear on the cash basis reports.
We can help you set up procedures to achieve the
monthly management reports (accrual and cash basis) you need
to run your business. We will provide you with the training, set up
the memorized reports, teach you how to interpret them, find
and correct mistakes plus find ways to simplify the process.
We are terrific at correcting problem QuickBooks files. If you have a hi speed internet
connection, we can work together at times that are convenient
to your schedule, in small or large doses. Save
accounting fees, learn the process. Call us to find out
more. 1-800-216-0763 We are CPAs with over 20 years
accounting and software experience. You will not find
more knowledgeable support.
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