The best way to begin this blog topic is to discuss what on earth are we talking about?
Accrual Basis is a bookkeeping method in which you regard income or expenses as occurring at the time you ship a product, render a service or receive a purchase. In Accrual accounting, the time when you enter a transaction and the time when you actually pay or receive cash, may be two separate events. An Accrual-Basis report shows income regardless of whether your customers have paid their invoices and expenses, regardless of whether you have paid all your bills
Cash Basis is a bookkeeper method in which you regard income or expenses as occurring at the time you actually receive a payment of pay a bill. A Cash-Basis report shows income income, only if you have received cash and expenses. If you have not received a payment for an invoice, a Cash-Basis report does not include the income
What's the difference? The Cash accounting method is very straightforward: When cash comes in the door, we record it as revenue & as cash goes out the door, we record it as an expense. The Accrual accounting method is a bit more complicated. With the Accrual method, you need to record revenue when you earn it. For example, you ship a customer on net 30 terms, Using the Accrual method, revenue would be recorded when the product ship, whereas in the Cash method, revenue is recorded when the customer pays after the 30 days.
Likewise, when you purchase an inventory item, your Bill, Check or Credit Card charge will debit the item's Inventory Asset account and credit your Accounts Payable, Bank or Credit Card account. It is not debited to an expense account because (a) it is an asset that you can sell for future benefits & (b) you record the expense to match the income. When you ultimately sell the inventory, QuickBooks will record Revenue and Cost of Good Sold.
So if you are using the Cash Method, you would expect there to be no Accounts Receivable, right? That is not always the case, especially if you have Inventory. Recall that when you create an invoice, QuickBooks records both the Revenue and Cost of Good Sold, but since you are on the Cash Method, Revenue is not shown your Profit & Loss report until you receive the check from your customer. But it would seem right to not record the Revenue, yet still record Cost of Goods Sold, so QuickBooks will temporarily "plug" that amount into your Accounts Receivable. It would make a lot more sense to plug that back into Inventory Asset, but QuickBooks is QuickBooks.
Here are some helpful hints:
The best way to track your Inventory Purchases is to run the Inventory Valuation Summary/Detail reports for all dates:
- Accrual-Basis reports will count Sales as of the Inventory Date & Count Expenses as of the date the goods or services were received
- Cash-Basis reports will provide the reader with a history of cash inflow & outflow
- Under Cash method, Income is reported in the year it is received & expenses are generally deducted in the year they are paid
QuickBooks automatically sets itself to the Accrual Method of accounting because the Generally Accepted Account Principles (GAAP) basis requires the Accrual Method. But since the GAAP is what's generally accepted & not what's required, you are able to customize your QuickBooks to record in the Cash Basis instead.
Although you may have your preferences set to Cash-Basis reporting, some reports will automatically default to an Accrual Basis. Since Accrual Basis is the more common of the two types of accounting method, QuickBooks defaulted the Profit & Loss Report to this method. If you would like to be able to run your Profit & Loss Report without having to customize it each time, you can setup and save a customized report
The process for customizing your Profit & Loss Reports differs in QuickBooks Desktop & QuickBooks Online
- In QuickBooks Desktop:
- Click on Reports Tab
- Run the Profit & Loss Report
- At the top left of the Report, click on the Customize Button
- In the pop-up window, set the Account Method to Cash Basis
- Click Run Report
- In QuickBooks Online:
- Click on Reports to open the Report List page and select the Report you'd like to view
- At the top, click the Customization button
- In the new window that opens, go to the General section and then note which Accounting Method is selected
- Click to select a new Account Method
- Make any other necessary customizations and click Run Report
Your Profit & Loss Report shows the Sales of Product Income accounts and the Cost of Goods Sold (COGS) accounts that are associated with your inventory-enabled Product/Service Item. COGS is an account that reflects the cost of materials and goods held in inventory and then sold. When you sell an item from your inventory, COGS increases by the amount you paid for that item when you purchased it. The difference between the income from the sale & the increase in COGS is the Gross Profit of the sale of that item