About accrual vs. cash accounting basis

What is the difference and which one should your firm use?

Ajera supports both accrual and cash accounting methods. You have the option to report your financials (Balance Sheet, Profit and Loss Statement, Trial Balance, and Ledger) on an accrual basis, cash basis, or both. Deltek purposely designed Ajera to work this way to meet your needs for monthly financial and year-end tax reporting.

The main difference between accrual and cash accounting is about when – when you recognize revenue and expenses for reporting.

Accrual accounting:

• You recognize income when you have a right to that income (you bill a client).
• You recognize expense when you incur a debt (you receive a vendor invoice).
• You do not wait until funds are actually exchanged before you recognize the transaction.

Cash accounting:

• You do not recognize income until you actually receive payment from a client.
• You do not recognize expense until you actually make a payment to a vendor.

Why you might use accrual...

Accrual accounting provides a more accurate picture for making business decisions, as it closely matches income with the expense that helped to generate it. Typically, architectural and engineering firms often experience a long gap in time (an aging issue) between issuing an invoice and receiving payment. In these instances, cash accounting provides an uneven comparison between income and expenses.

The accrual accounting basis is more widely accepted by accountants as it is a requirement for conforming to generally accepted accounting principles (GAAP) in preparing financial statements, such as the Balance Sheet and Profit and Loss Statement.

Why you might use cash...

The cash accounting basis is often used to report income tax. In this way, you don’t pay tax on income until you actually receive it.

Why you might use both...

We find that many small and medium-size firms actually use both methods. They often use the accrual basis for internal, month-to-month accounting and for producing financial reports. They then produce reports using the cash basis at year-end for their tax reporting.

Contact your accountant for additional information and thoughts on how accrual vs. cash financial reporting might help you with your business decisions.