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J
jkope26
June 25, 2024
Question

Accrual vs. Cash Revenue- Reporting

  • June 25, 2024
  • 1 reply
  • 0 views

We are set up on QBO for accrual based accounting.  For reference, we are a project based service providing company.

When we record an invoice for a project, the debit goes to AR and credit goes to a prebill (liability) account.  Every month we calculate revenue for each project based on % complete. To record the revenue to each project, we use a sales receipt- debit to prebill account and credit to revenue account. (We were instructed during set up that this was the best way to record the revenue by project.) 

Our accrual based P&L shows our revenue correctly.  However, our P&L, if selecting cash method, is not showing the correct revenue amount. A side by side comparison shows me that they are made up of the exact same transactions (sales receipts) and the cash based report is not taking payments received during the month into consideration at all.

Any idea on why the cash basis report would be pulling incorrectly? Is there a setting we need to adjust?

Thank you!

1 reply

C
ChristineJoieR
June 25, 2024

There are a few keys to consider regarding why your cash basis report is in QuickBooks Online (QBO), Jkope26.

 

Journal entries show up on both cash and accrual basis reports in QuickBooks Online (QBO). This means the initial journal entry you make to A/R and income for invoices sent each month will appear on both report types.

 

As for the sales receipts, they are likely being treated as cash transactions in the accounting system. They also affect the report for the cash method.

 

The prebill (liability) account complicates the cash vs. accrual difference. Since you're moving money from a liability account to revenue using sales receipts, QBO may interpret this as a cash transaction regardless of the reporting method.

 

Furthermore, the QuickBooks platform converts accrual to cash reports by removing unreceived income and unpaid expenses. However, in your case, the system isn't recognizing the payments received during the month because of how the transactions are structured.

 

To address this issue, we can review your account settings to ensure the pre-bill account is set up correctly as a liability account. Instead of using sales receipts to record revenue, you might explore using journal entries or invoices to better reflect the accrual-to-cash conversion.

 

Additionally, we advise consulting your accountant since they can review your specific setup and recommend the best way to structure your transactions for accurate cash and accrual reporting.

 

Keep me notified in the comment section below regarding the cash and accrual reporting setup. I'll be here to support you.

J
jkope26Author
June 25, 2024

Thank you for your quick response. To clarify though, we do not use journal entries at all in this process.  Here is how our transactions are currently structured.  For example- Project A is 50K and is to be billed at the signing of the contract:

 

1- May 2024 Create Invoice for 50K 

Sales -> Invoice -> Create Invoice

By creating the invoice we have now debited AR 50K and credited prebill 50K (the liability account)

 

2- May 2024 Revenue Recognition (assume 25% of revenue is being recognized)

Sales -> Sales Receipt

By creating the sales receipt for Project A, we debit prebill for 12.5K and credit revenue for 12.5K

 

3- May 2024 Project A is paid for by client. 

The cash receipt is pulled in from our bank and applied to the open invoice. Debit Cash 50K Credit AR 50K

 

4- June 2024 Revenue Recognition (assume remaining 75% of revenue is being recognized)

Sales -> Sales Receipt

By creating the sales receipt for Project A, we debit prebill for 37.5K and credit revenue for 37.5K

 

Cash basis i would expect to see 50K revenue in May 2024

Accrual basis I would expect to see 12.5K revenue in May 2024 and 37.5K revenue in June 2024

 

Given this scenario and how we record our transactions, could you please explain why our reports wouldn't show this? 

J
JoanaC
June 26, 2024

Greetings, @jkope26. Let me provide more details about your P&L report and the comparison between cash and accrual accounting.

 

Each bookkeeping method has its advantages and disadvantages. It's crucial to comprehend each method to choose the best practices for your business. If you're uncertain, seek advice from your accountant. To help you decide between Cash and Accrual accounting, let me share more information:

 

On a Cash basis, you record income and expenses at the time you receive a payment or pay bill.

 

  • This report counts income or expenses only once you get a payment or pay a bill.
  • If you sent an invoice or got a bill but the money hasn’t changed hands yet, your report doesn’t include it in your income or expenses.

 

On an Accrual basis, you record income and expenses when you send an invoice or receive the bill.

 

  • This report counts income and expenses regardless of whether the invoice or bill was paid or not.
  • It includes income and expenses even if the money hasn’t changed hands yet.

 

However, if you're using the Revenue recognition feature might be activated and scheduled to run monthly. It could be causing the cash report to be inaccurate, as revenue in accrual accounting is recognized when it's earned, not when the money is received. We'll have to check the frequency of your revenue recognition feature to ensure accuracy. Follow these steps:

 

  1. Go to the Gear icon, then select Account and Settings.
  2. Click Sales.
  3. In the Products and Services, select Edit.
  4. Check if Revenue recognition is on or off and the Frequency is Daily or Monthly.
  5. Select Save and then Done.

 

Moreover, let me share this article that can assist you in customizing your reports: Customize reports in QuickBooks Online.

 

Keep me posted if you still have confusion with your reports. Have a great day.

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