Which Is Better Cash Or Accrual Accounting

I am often asked this question by business owners who use Quickbooks and are not sure which is better the cash or accrual method for reporting their business results. The general rule is that cash basis accounting is simpler to understand and consistent with most taxpayers income tax filings. As businesses grow and their operations become more complex with customer accounts receivable and vendor payables the accrual method is preferable because this method more accurately reflects the businesses revenues and expenses as incurred rather than when paid or received in cash.

I recommend that my clients use the accrual method for the simple fact that it more completely 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 so this approach of using the accrual method in Quickbooks will satisfy all of the business needs but still allows the flexibility required to satisfy the tax return at year end. The challenge to 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.

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