![]() In our earlier example, we collected $120,000 on 12/29/18, which QBO correctly reflects as $120,000 on cash basis reports. The hole I’m referring to is one very specific issue that, as an accountant, comes up a lot: In QBO, all journal entries affect both cash and accrual basis reports, even if the journal entry doesn’t affect cash. Wait, they already offer this? What are you complaining about? Just about every report in QBO gives you the option to toggle between Cash and Accrual basis, so they clearly understand the importance of this feature: Quickbooks Online already offers a feature to toggle between cash and accrual basis reporting. The most frequently cited reason for wanting to use both is that management wants the accuracy of accrual basis reporting but the simplicity and flexibility of filing the company’s tax return on the cash basis. This may sound farfetched, but it’s actually pretty common. The hole in QBO shows up for companies that want to keep their books on both the cash and accrual basis. Okay, I’m following, but where is the hole in QBO? A comparison of cash basis and accrual basis reporting. This way you recognize your income ($10,000 per month) and your hosting costs in each month of 2019, showing a monthly profit each month of $8,000 ($10,000 of income minus $2,000 of expenses), for a total profit in 2018 of $0 and a total profit in 2019 of $96,000. This is a much more accurate representation of the actual contract, which didn’t even kick in until January 2019. Instead of recognizing the $120,000 of income in December of 2018, you should show it as Deferred Income (a liability) in 2018, and would recognize 1/12 of this income in each month of 2019. If, instead, you decided to keep your books on an accrual basis, your Profit & Loss statements for 20 would look very different. This is not an accurate representation of your company’s performance. ![]() On the cash basis, your Profit & Loss (“P&L”) would show a $120,000 profit in 2018 (because you collected the full fee on 12/29/18) and a $24,000 loss for 2019 (because you had no additional collections, but paid your hosting costs of $2,000 per month). Your only expense is your monthly hosting costs of $2,000, which you will pay on the 1st of each month starting in 2019.The customer pays you on December 29, 2018.You bring on your first customer, who agrees to a $120,000 annual contract covering all of 2019.You start an IT company that will provide IT services under annual maintenance contracts.The accrual basis, while more difficult to maintain, can paint a much more accurate picture of your company’s performance and health. Small companies often file their tax return using the cash basis, so if the company’s management does not care to see accrual basis reports, the cash basis is probably enough. Which accounting method should I use for my company’s books?Ĭash basis accounting is undoubtedly easier and less time consuming to maintain, and for many small companies, it is sufficient. If you pay an attendance fee today for a trade show taking place next year, recognize the expense in the month that the trade show actually takes place. ![]()
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