What is Cash vs. Accrual Accounting and How To Change It In Quickbooks
Did you know that there are basically 2 ways to report your information in accounting (on reports such as your Profit & Loss and Balance Sheet)?
Cash accounting basically means you only count as income the money you actually receive. Expenses are only counted when you actually pay the bill. It's basically cash in and cash out, regardless of whatever other bills you owe or whatever amount of money your customers owe you.
On the other hand, accrual accounting means you count as income anything that you have billed your customers, regardless what you have actually collected. And your expenses are bills you owe to vendors, regardless if they have been paid or not.
For example, assume you an invoice a customer $50,000, but have only collected $10,000 of the invoice. Under the cash method, your revenue is $10,000 and under the accrual method your revenue is $50,000. Big difference!
The same holds true for your expenses. Let's assume you have an outstanding bill you owe a vendor for $20,000, and you have only paid $5,000 of it. Under the cash method, your expenses are $5,000 and under the accrual method your expenses are $20,000.
So, which is better?
Well, the cash method is easier to understand, but the accrual method more fully reflects your actual business activity. The cash method can distort how your business is actually doing.
And Quickbooks makes it easy to switch between the 2 methods of reporting.
When you pull up a report in Quickbooks, simply click the button that says "Modify Report." Then, on the next screen you will see an option to choose either Cash or Accrual. Simply pick which one you want to see and click OK and your report changes accordingly.
You can also tell on the face of the report which method Quickbooks is defaulting to - just look in the upper left hand corner of your report and it will say either "Cash Basis" or "Accrual Basis."
It's as simple as that!