Cash basis and accrual basis are accounting methods that determine when and how you report income and expenses for tax purposes.
The IRS wants you to use the same method each year when reporting income or loss. You should talk to your accountant about which is most appropriate for your business.
What is cash basis?
When you use cash basis as the accounting method, income is reported when you receive payments, instead of when you invoice a customer. Expenses are reported when you pay bills by cash, check, debit card, credit card or any other forms of payment that takes out money from your bank account. If you use invoices (Create (+) > Customers > Invoice) and receive bills (Create (+) > Vendors > Bill) to pay later this report method will affect the amount reflected in your A/R and A/P accounts. On cash basis method, when you run the company’s Balance Sheet, it should show zero balance (or no balance) on A/R and A/P accounts.
What is accrual basis?
With accrual basis as the standard accounting method, income is reported as soon as you create invoice to a customer (Create (+) > Customer > Invoice) instead of when you record the payment and expenses are reported when you record a bill (Create (+) > Vendor > Bill) instead of when you record the payment.
Accrual basis is more financially accurate than cash basis reporting. It also may let you manage your business better by showing you trends in income and expenses well in advance of the actual payments you make or receive.
To change company setting for the accounting method:
From the home page screen
- Go to the Company “Gear” tab and click Company Settings under Settings.
- Select “Account Method” under Company heading.
- Choose the accounting method to which you’d like your reports to default, and then click Save.
Note: You can also keep your overall accounting method for reporting unchanged, but experiment with changing the accounting method only on an individual report here and there to see the difference that change makes in your reporting.
To change the accounting method on a report:
From the home page screen
- Go the blue navigation bar on the left, click the Reports tab
- Go to report (magnifying glass) and type to open the report and select the report you’d like to view (for example Profit and Loss report, type Profit and Loss).
- At the top left, click the Customize blue button.
- In the new window that opens, go to the General section and then note the Accounting Method selected.
- You can click to select a new accounting method (cash basis or accrual).
- Make any other necessary selections and click Run Report.
How do I change the accounting method for my company in new QuickBooks Online