Cash v. Accrual Accounting: Why It Matters

One of the more important things to consider when starting a new business is the decision to use the cash or accrual accounting method. This decision is not just another item to check off your to do list, but one that has repercussions on how you do your taxes and on the future of your business. The key item to consider is which method will most clearly reflect the financial outcomes of your business.

It is also important to note that once a method of accounting is established, it must continue to be used, or the taxpayer must file an accounting method change to request consent to change their method of accounting. This can get tricky, and end up costing you time and money to accomplish, so make sure you think through which method works best before you start recording transactions. Plus, by knowing what to expect, it will make it a little easier on you at tax time (which we can all agree, is a pretty nice thing).

So I get they’re different. But how are they different?

Cash basis accounting is probably the most common for small business owners, often because of its simplicity. Income is reported when cash, or the constructive receipt of cash, is IN HAND. Same principal applies for expenses. You don’t report, or deduct, your expenses until they’re actually paid.

Accrual basis accounting is a little more complex. Income is reported when it is EARNED. This means it may often be recorded before payment is actually in hand. Expenses follow the same vein, and are reported when they occur and are fixed as to the amount.

Okay, but which is better?

It depends on your business type and what you do. The accrual basis of accounting helps you better understand the current condition of your business finances, while the cash basis of accounting focuses on your current cash on hand. The accrual method may allow you to see a better picture of your financial position and company profits because it reports everything earned during a period as well as expenses incurred. You need to also keep in mind, while the cash basis offers simplicity in application, there are some limitations on the use of the cash method of accounting. Further, accrual accounting is generally used by a business that has inventories as part of their business operation.

What about tax reporting?

The type of accounting method you choose affects your tax deductions. It’s a subtle difference, but an important one. Say you, a calendar year taxpayer, received an expense invoice in November 2015 and pay it on January 15, 2016. Under the cash method, you won’t be able to deduct that expense until you report taxes for 2016. However, under the accrual method, you can claim the deduction in 2015 if all events have happened to fix the amount due.

Now, let’s talk about income reporting. You, again a calendar year taxpayer, invoice a customer in November 2015 for services performed and they pay you January 15, 2016. If you’re using the accrual method, you’ll pay tax in 2015 on services for which you haven’t actually received payment, since the right to receive, and the amount of payment to be received, was known and fixed in 2015. However, under the cash method, you would pay tax on the service completed once the cash was in hand in 2016.

The moral of the story?

It’s important to understand your business and your finances. By understanding your books and where you’re headed, you’ll be able to choose the accounting method that works best for you.

Still not sure what we’re talking about?

Here’s the truth: taxes are complex and complicated. You don’t have to know it all. We can help.

Cash v. accrual

The Power of Corporate Giving

Corporate givingA few weeks ago, our Fargo office was a sea of black and white. It was Live United t-shirt day and staff at all levels proudly sported their t-shirts. Why, might you ask, was this so important? Aside from the obvious answer that everyone loves getting their picture taken, it was a testament to a cultural priority. In layman’s terms, Eide Bailly thinks corporate citizenship is pretty cool.

We’re not alone. I know, I know, we talk about numbers a lot here. After all, quite a few of us are accountants. But the numbers behind corporate giving and philanthropy are worth repeating. In 2014 alone, U.S. companies’ charitable contributions totaled $17.77 billion. To put that into perspective, that’s more than the budgets of 22 states. (numbers courtesy of Carlson School of Management)

Corporate giving is a way for corporations to give back to their communities and the people who help them succeed. From donations of dollars to donations of volunteer time, there are a number of ways for organizations to give back.

So what are some of the reasons to consider it?

  • It helps you understand the people you work with. What organizations are they involved in outside of work? What causes do they care about? By engaging your employees, you can build a better culture. A recent study found that workers are willing to work harder for less payment when given information on the employers’ engagement in charitable giving programs (thanks again Carlson School of Management).

At Eide Bailly, we have a corporate citizenship initiative that allows our employees to gain matching dollars to the charity of their choice up to a certain amount. This is fairly easy to implement … just make sure you budget for it.

  • It keeps you active in your community. Unless you do business in a bubble, you are surrounded by a community which is often vital to your success as an organization. Being actively involved in the community is at the heart of corporate giving. It not only gets your name out, but it shows you care.

Seem overwhelming? You don’t have to do it all. By taking a look at your corporate giving strategy, you can find ways to be actively involved in the community without going too crazy. For instance, we make corporate contributions based on our core business values and then leave the rest up to our employees via the matching program.

  • It engages your employees and fosters morale. Take a day and have your employees volunteer together. It can help build teams and boost employee morale.

Can’t give up a whole day? Find creative ways for your employees to be involved, whether it be campaigns, food drives, etc. Our Eide Bailly United Way team held a kickoff event where we heard from organizations impacted by our United Way giving. Then they illustrated our giving for the office by stacking children’s books for every donor and allowed employees to watch the pile grow.

  • There are tax deduction benefits. You knew it was coming … after all, we are accountants. Charitable contributions have the potential to qualify as tax deductions against your business’ annual tax liability. To learn more, chat with your tax professional.

The moral of the story? There are some very real benefits to having a corporate giving program in your business, regardless of size. Plus, it just might give you a warm fuzzy feeling that will last long after your turkey, mashed potato and stuffing food coma wears off.

United Way_Stairs_Top

 

The Eide Bailly team decked out in their Live United shirts

 

Business Planning 101

Has this ever happened to you? You get in the car, begin your journey and realize you have no idea where you’re headed or how to reach your destination. So what do you do? For some, they keep on driving, assuming they’ll figure it out along the way. For others, they pull out a map or plug their destination into their smart phone and let GPS take it from there. Then, if they still need help, they stop and ask for directions.

The same scenario can apply to starting your business and mapping out where you’ll go in the future. Some people start a business with no clear end in sight or no true direction or course. While this “fly by the seat of your pants” approach can be fun and exhilarating, we’re here to tell you it’s not the ideal way to start and run a business (sorry to rain on your parade).

Rather a business should model itself after the latter group in the above example.  By pulling out a map or plugging in your end destination, you can plan a trip that will get you to the place you want to go. Hopefully, it may even get you there in record time.

This is the heart of business planning, an essential function of running a business. Consider your business plan a roadmap or GPS for your organization. It’s an important step, because it keeps you on track during the early years of your business and gives you a defined destination to reach, as well as keeping you on track along the way. A business plan generally includes:

  • Company description (What is it exactly that you do? What sets you apart? Who do you serve?)
  • Organization (we’re talking the structure of your business and what management looks like)
  • Service/product line (What are you selling? How does it benefit a potential customer?)
  • Marketing and sales (How will you sell your product? How will people hear about you?)
  • Funding (How are you going to get started? Are you asking for funding?)
  • Financial projections (How are you going to make money?)
    • Projections for 3-5 years ahead
    • Yearly milestones (and how you’ll get there)
    • Revenue projections

So now you have your destination. You’re trucking along, enjoying the scenery and gaining momentum. But wait … you’re lost again. Your GPS told you were coming up on a national park and instead, you’re in the Walmart parking lot. Now what?

ASK FOR DIRECTIONS. A business plan is a really great map for your organization and an excellent exercise in understanding not only why you got into business the first place, but where you want to go and eventually end up. However, it’s not a concrete plan and sometimes, you encounter unexpected obstacles (hey, if you could see into the future and predict with 100% accuracy, you’d be a pretty wealthy business owner). So don’t be afraid to stop and ask for directions or help along the way.

Here a few common questions to ask along your business journey:

  • What would have to occur over the next three to five years for your business to be where you want it to be?
  • What are your profit and growth plans? How have they changed since you started this journey?
  • How much longer do you want to work in the business?
  • How quickly can you make effective decisions? Do you even have the information you need to make these decisions?
  • How do you stack up against your competition? (benchmarking anyone?)
  • Do you still have a clear vision/mission for your organization?

Take a step back every once in a while and reassess where you’re going and if your original destination is till where you want to be headed. If not, there’s always time to readjust.

Further, enjoy the journey. What you’re doing is pretty cool, and we want to see it succeed, grow and thrive.

Too wordy for your taste? Check out this infographic:

Business Planning

 

Outside the Comfort Zone: NUMBERS

“All progress takes place outside the comfort zone” … or so the saying goes. To say working at an accounting firm was out of my comfort zone would be an understatement. Anyone who knows me knows I’m a full on right-brained, creative thinking, word loving marketer. Numbers have never really been my thing.

But there I was, two years ago, tasked with the job of marketing and growing the Fargo office of a CPA (that’s accounting) and business advisory firm. So I strapped on my thinking cap and armed myself with persistence and the willingness to learn.

Which brings us to last week, when I decided to research a blog about cash versus accrual method accounting (check it out!). I put on my thinking cap, and thought about channeling my inner Jake from Fargo 3D Printing at State of Technology:

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An hour … or two … (or possibly even three) later, I had the beginnings of a blog in need of some minor major edits. Apparently I still don’t quite have a grasp on all things accounting … or how to explain them in 140 characters or less.

So why do I tell you this? To help you understand that you’re not alone when you “don’t get it.” The numbers part of your business can be challenging and even down right aggravating. You dread tax day, you don’t understand what an audit is (except you really don’t want Katie says 1one) and concentrating on the day-to-day detail sometimes gives you a headache.

If there’s one thing I’ve learned, however, it’s the importance of getting the financials and the numbers right. If you don’t, it will follow you around and cling even longer than your sugar crash after Halloween.

So do more than just hire someone to do your taxes or a friend with a calculator to manage your books. Find a trusted business advisor who can help you understand the numbers side of your business and help you move your organization forward.

After all:

“A CPA should be a partner in your entrepreneurial dreams. You don’t want to dread a trip to the CPA like you dread a trip to the dentist.” (source)