Main Concepts with demo for MicroSoft 365 Business central and Quickbooks users
As a business owner, you’re no stranger to the world of accounting. But have you ever stopped to think about the method behind the numbers? There are two primary accounting methods: accrual and cash basis. Understanding the difference between these two methods is crucial for accurate financial reporting and informed decision-making.
Accrual Accounting: The “Earned” Approach
Accrual accounting recognizes revenues and expenses when they’re earned, regardless of when the cash changes hands. This method matches the revenue with the expenses incurred to generate that revenue.
Example: Let’s say you’re a consultant, and you complete a project in December, but the client doesn’t pay until January. Under accrual accounting, you’d recognize the revenue in December, even though the cash wasn’t received until January.
Cash Basis Accounting: The “Cash-in, Cash-out” Approach
Cash basis accounting, on the other hand, recognizes revenues and expenses when the cash is received or paid. This method is simpler, but it might not accurately reflect the company’s financial performance.
Example: Using the same consultant example, under cash basis accounting, you’d recognize the revenue in January, when the client pays, rather than in December, when the project was completed.
Why Choose Accrual Accounting?
Accrual accounting provides a more accurate picture of a company’s financial performance, as it matches revenues with the expenses incurred to generate those revenues. This method is also required by Generally Accepted Accounting Principles (GAAP) for most businesses.
Guidelines for Generating Financial Statements on a Cash Basis
When generating financial statements on a cash basis, keep the following guidelines in mind:
- Use the correct chart of accounts: Ensure you’re using the cash basis chart of accounts.
- Exclude accruals and prepayments: Omit accruals and prepayments, as they’re not relevant to cash basis accounting.
- Include only cash transactions: Only include transactions where cash has been received or paid.
- Reconcile with the bank statement: Verify that the cash basis financial statements reconcile with the bank statement.
DEMO FINANCIALS STATEMENT SHOWING ACCRUALS AND CASH BASIS ACCOUNTING
Why Sales and COGS are different in both Accounting Method ?
As per Accrual Accounting Method, Sales includes credit sales where as in case of Cash basis Accounting Method we have to deduct total balance of Account Receivable from Total Sales Amount ($977503.73-$210740) = $766763.73.
Similarly, as per Accrual Accounting Method, COGS/Purchase includes credit purchase where as in case of Cash basis Accounting Method we have to deduct total balance of Account Payable from Total COGS/Purchase Amount ($617,590-$146,580) = $471,010.
In conclusion, understanding the difference between accrual and cash basis accounting is essential for accurate financial reporting. While accrual accounting provides a more comprehensive picture of a company’s financial performance, cash basis accounting can be useful for small businesses or those with simple financial transactions. By following the guidelines outlined above, you can generate financial statements on a cash basis using Microsoft Business Central.
Here i am enclosing two videos tutorial for Microsoft Business central users and Quickbook users for quick understanding and learning. Lets watch these videos and learn something new.
Author: Syed Haseeb
Clear, concise and point to point material.
Nothing new but your illustration has given added value in this article.
Haseeb sb, Waqai Concept clear hogaya. Ab next Income Tax return per bhee koi article likhain.
Accrual Accounting is professional Accounting. Cash Accounting is just for Shop keepers and day to day earners.
Haseeb sir. I have learnt a lot by reading your articles. Very good contents your have created so far.