Cash vs. Accrual Acctn’g
Interesting topic.
In cash accounting you account for cash in and cash out. You aren’t owed anything. A local candy store might be a good example, people come in and you get cash, you buy candy in bulk for cash. But you don’t extend credit if someone wants to buy.
In accrual accounting things change a lot. Income is posted as being received when you bill someone, that throws people off sometimes. But if you think it through it really makes little difference, you will get the money. The only time this appears to be an issue is at the end of the year. But when the new year rolls around, and you receive money on an invoice from last year, QB does not post it to the current years accounts - after all it was already posted to last years.
The problem I see is that people want to switch back and forth, and when the financial statements don’t make sense to them then there are problems. If you invoice and the customer owes you money there is a difference in the way the two systems handle it.
Accrual - the cost of what was sold is sent to COGS immediately and the amount you invoiced for becomes a receivable and is sent to sales.
Cash - Nothing happens! Well inventory is reduced but that is all. When you tell QB that you received some of the money owed then and only then does QB send the cost of what was paid for (the cost of what you sold) to COGS and the amount received goes to sales. Now if you receive the full amount owed that works out pretty good, the full cost goes to COGS. But if your customer only pays half of what is due, then only half of the cost is sent to COGS, and QB waits to be told that the rest has been paid for, cash has been received. This really screws up COGS when you try to look into the detail behind the postings - at least for me.
People seem to want the full cost to go to COGS when an invoice is written in the Cash system, but that just does not happen.
Trying to compare either of the financial statements is a lost cause too, you just cannot do it. You cannot compare the cash basis profit and loss to the accrual profit and loss, and trying to compare the balance sheets is even more of a problem.
Of course keep in mind that I am not an accountant, so what seems wonky to me, might make a lot of sense to someone who is actually trained.
