What is the Difference Between Accrual and Cash Basis Reports?

When you receive reports from your bookkeeper, you may have noticed that they usually include the words “Accrual Basis” or “Cash Basis” somewhere below the title of the report. What do these mysterious words mean? 

Accrual Basis 

Reports in an accrual basis are pulling information from your accounting system based on when income or expenses are earned or incurred. It pulls transactions based on the date assigned to the invoices or bills. It disregards if or when an invoice or bill is paid.

Cash Basis

Reports in cash basis are recognizing information from your accounting system based on when income or expenses are received or paid. It disregards unpaid invoices and bills.

What does this mean?

Let’s imagine you complete the following transactions within the month of July:

  1. Create and send Invoice 1 to a customer for $500 on July 20th
  2. Create and send Invoice 2 to a customer for $800 on July 31th
  3. Receive and enter Bill 3 from a supplier for $30 on July 5th
  4. Receive and enter Bill 4 from a supplier for $70 on July 25th
  5. Receive $500 payment from your customer for Invoice 1 on July 30th
  6. Send $30 payment for Bill 3 to your supplier on July 15th

If this is all you have done, what would your accrual basis July reports show?

          Income –     $1300

          Expenses –   $100

Why? Because with accrual basis, the reports are a total of all invoices and bills that are dated in July.

But what would your cash basis July reports show? 

          Income –   $500

          Expenses –   $30

Why are the cash basis amounts different from the accrual amounts?

The cash basis reports are only totaling the transactions that were paid in July. They do not include the invoice for $800 or the bill for $70 because these were not paid in July.

Viewing reports in cash or accrual basis is simply looking at the same information from two different viewpoints. Reviewing your reports in both accrual and cash basis helps you to get a fuller picture of how your business is performing.

What story is your business trying to tell you?  We believe looking where your business has been is just the beginning of your story. Looking at your reports in both accrual and cash basis can help you understand a bit more of your business story to set you up for writing the next chapter of your business story.