Determine if your business may use the cash method for taxes. Learn when keeping your books on accrual accounting is better. Get help to run an efficient office using QuickBooks as a key tool.
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Cash or accrual

Which method is best for taxes and for managing your business.
 

Work with a QuickBooks advisor
Call 800-216-0763





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  read more

Accrual 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 more

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?
Accrual 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:

Who is allowed to use the cash basis for tax reporting?

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 income.

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. 2001-10].

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 required).

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.  

Follow these 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.

Guidelines for building accrual based financial reports

For the following transaction types will record the sale and expense when:
Transaction type: Accrual Reports Cash Basis Reports
Revenue:    
Invoice/Credit Memo Date of invoice Date of receive payment transaction*
Statement Charge Date of invoice Date of receive payment transaction*
Deposit (when no invoice or statement charge was entered) Date of deposit Date of deposit
Expenses:    
Enter Bill/Credit Bill Date of bill/bill credit Date bill was paid *
Credit Card Charge Date of credit card charge Date of credit card charge
Write Check Date of check Date of check
Miscellaneous:    
Journal Entry Date of journal entry Date of journal entry
Register 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 statements.

 
 These 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
Accounts Receivable
Accounts Payable
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.

For the 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.  The 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 checks).
  • 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 'pay bills'
  • 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 Income"
  • 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 finish.
  • 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 http://www.qbalance.com/quickbooks.htm
  • 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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