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Cash Basis vs Basis in QuickBooks

This is one among so many QuickBooks Services provided. Being a good business owner, it’s very important that you maintain an accurate record and account of all your expenses, especially when you are planning your business in black and going to grow in the future. 

Though you don’t look into your accounts personally but must know how things could work more in your favour with the most favourable accounting method. 

So, basically, there are only two fundamental methods of accounting that are must-know cash basis accounting & accrual-based accounting, there are the two primary methods that record your income and expenses. It’s really necessary for you to keep in mind how each of these methods works so that you can wisely choose the best one for your business. 

  • Whatever method you choose to manage your accounts and finances for your business is basically a management decision. So, whichever method you select totally depends on your type of business, your business goals, the resources you have, and the financial need of your company or organization. 
  • If your company makes less than $25 million in annual gross sales, you have the freedom to choose whichever method you feel is better and makes more sense for you. 

What is a cash method?

  • With the cash accounting method, you can keep a record of your income when it is received and expenses when they are paid. 
  • Let’s understand this better by taking an example- if you invoice a client for $2,200 on January 5 and you receive the payment on March 1 then in such case the record of income received will be for the month of March and this is when you actually had the money in hand. 
  • The most important point of this method is that it does not take into the record any accounts receivable or payable. 
  • This method is only applied to payments from clients whenever the payment is received whether it’s in the form of cash, checks, or credit card receipts. 
  • Similarly, in cash accounting method it only records your expenses when money leaves your account to pay any of your supplier, vendor or any third party. 
  • Like if you have a jewellery business and you purchased some jewellery boxes on credit in the month of December but didn’t really pay the bill until January then in such a case it will be recorded all your supplies as a January expense.
  • If you are a small business owner with a yearly income of less than $25 million then this cash accounting method is best for your business accounts management. 

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What is an accrual method?

  • This method does not maintain a record based on “when the money is actually received”. 
  • In the accrual accounting method, they record all your income and expenses whenever they are billed and earned. Let’s understand this better with an example- If your small business bills $3,400 in income on January 5 then in such a case that $3,400 income would be recorded in January’s bookkeeping even though the payment didn’t get clearance from your account until the month of July. 
  • Similarly, it’s so true for the expenses part. Like if you are a jewellery shop owner and buys jewellery box supplies on credit in the month of January but didn’t really pay the bill until June month then in such a case the records will be made as a January expense. 
  • Accrual accounting exactly shows you how much money you have spent and earned within a particular time period. In short, it gives you a better and clear overall view of expenditure habits so that you can plan better for operation in the coming months. 
  • If you have a small business with a yearly income of more than $25 million then this accrual accounting method is best for your business to manage and record all your accounts.

How to set your preference?

Here are some quick and easy steps to help you with setting your preferences.

The following steps are listed below:

  • First of all, log in to your file as the administrator and make sure that you are in single-user mode. 
  • Now, go to the “Edit” menu and select your preference there. 
  • Select “reports & graphs” and then go to the “company preferences” tab. 
  • Select “accrual or cash” from the summary report basis section. 
  • Finally, click OK.

How can you switch to a cash basis?

Following these simple steps, you can easily switch to a cash basis in no time.

The steps are as listed below:

  • Click on the “gear icon”. 
  • Now, choose “account and settings”. 
  • Click on “advanced”. 
  • Next, click on the “pencil icon” in the “accounting” section.
  • You can choose “cash” in the “accounting method” drop-down. 
  • Click on “save”. 
  • Finally, select “done”. 

This is how you can select your preferences or can switch to any method whenever you want. Just follow the above-mentioned steps and you will reach your destined result. 

Zaraki Kenpachi