Accrual vs. Cash Basis

The two primary accounting methods are accrual and cash basis

The main difference between the two methods is the timing of when expenses and revenues are recognized. There are advantages and disadvantages to both methods, so depending on your company’s operations and goals, you can decide which method best aligns with your company’s needs and preferences.

Consult with a Certified Public Accountant or tax professional to ensure the appropriate accounting method is used.

Accrual Accounting

Under this method, revenue is recognized when a sale transaction occurs and expenses are recognized when the purchase of goods or services occur, regardless of whether any cash was received or dispersed.  

The Accrual method is more complex but provides a more accurate picture of a company’s financial position due to its recognition of payables and receivables. However, because some transactions are recorded before cash is actually received, a company’s revenue books will not be aligned with the current amount of cash in their bank account.

The Accrual method is most commonly used by publicly traded companies that are required to receive a financial audit and is accepted under the Generally Accepted Accounting Principles (GAAP).

One example of revenue recognition under the Accrual method: You work for a landscaping company, you mulched a lawn for a client and you invoice the client $200 on December 31. You will recognize revenue on December 31 because the service was performed that day, regardless of whether you received a form of payment from the client.

Cash Accounting

This method is known for its simplicity of keeping track of cash flow because revenue and expenses are accounted for only when cash is received or dispersed.

The Cash method gives you an accurate picture of the cash in your bank account today but does not account for payables or receivables; therefore, the risk of overstating the health of a company is present and does not provide an accurate representation of a company’s financial position. Typically, this method is most used for small businesses and sole proprietorships.

The Cash method is not acceptable under the Generally Accepted Accounting Principles (GAAP).

One example of a revenue recognition under the Cash method: Let’s use the same example from above. You work for a landscaping company, you mulched a lawn for a client, and you invoice the client $200 on December 31. You do not recognize revenue on December 31, because you have not received any form of payment. You will record revenue on the day you receive cash, a check, or a credit card payment from the client for your mulching services.

Why is it important to choose the correct accounting method?
  • It is useful to track your cash flow and understand the future of your company’s financial position
  • It is important for tax purposes in order to determine the accurate amount of annual taxes you will need to pay to the Internal Revenue Service (IRS)
  • It is important to ensure compliance of state and federal regulations. Some states have a preferred accounting method to be used by businesses
Can a company change its method of accounting?

Yes, but a tax return must be filed and approved by the Internal Revenue Service (IRS) before changing its accounting method. To make this legal change, Form 3115, Application for Change in Accounting Method, must be filed by the taxpayer.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.







Hunkered Down, day 4

A new season.

Trying to stay focused. I can hear the news continually in the background and none of it’s good. Working from home is difficult when you want to sit with your family and reach out to others that you can’t be with.

Video conferencing and online services are working well. Praise God! Century Link is actually working. This may be a new normal for many of our clients who are trying these new technologies for the first time. It’s convenient and, hey, you only have to dress from the waste up.

My clients are all scrambling, adapting to the constantly changing markets and conditions. With forced closings, many are laying off, not knowing when their doors will reopen. We desperately need congress to finalize the stimulus package so we can stop trying to hit a moving target. Here’s what I know so far.

Proposed: Small Business Loans and Economic Impact Payments to Individuals

As of this morning, congress is still working out the details and has not passed the bill. The treasury department’s proposal would guarantee small business interruption loans up to 100% of 6 weeks of payroll for a wide range of eligible small businesses.

Two equal economic impact payments would be issued on April 6th and May 18th to eligible individuals. These payments are predicted to be $1,000 to $2,000 each.

In Effect: April 15th Tax Relief

Federal individual and corporate tax payments due on April 15th, 2020 are automatically deferred for up to 90 days without incurring penalty and interest. The deferral includes both 2019, and 1st quarter 2020, income and self-employment taxes. The deferral is expected to add an estimated $300 billion in liquidity to the economy in the near term. The deferral amounts are limited, so call us or check the IRS website for details: Payment Deadline Extended to July 15, 2020 and Notice 2020-17 (PDF), Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic.

See also: Hunkered Down, day 2

In Effect: Economic Injury Disaster Loan Program

Small business owners in the following designated states are currently eligible to apply for a low-interest loan due to Coronavirus (COVID-19): California, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Indiana, Maine, Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Rhode Island, Utah, and Washington. Click here to apply. Find more information on the SBA’s Economic Injury Disaster Loans at:

~Mitzi E. Sullivan, CPA

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

Free Tax Resources Provided by the IRS

  • Free File – prepare and file your federal income tax return for free using tax preparation and filing software.
  • Where’s My Refund? – is an online tool that will track your tax refund. You will need your Social security number or ITIN, your filing status and your exact refund amount to use the tool.
  • Online Payment Agreements – you can apply for a payment plan online to pay off your balance over time.
  • IRS2Go mobile app – Check your refund status, make a payment, find free tax preparation assistance, sign up for helpful tax tips, and more!
  • Online Account – use this tool to view: Your payoff amount, updated for the current calendar day, the balance for each tax year for which you owe, up to 24 months of your payment history and key information from your current tax year return as originally filed.

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