"Here's the Deal..." > ManagePLUS is accrual based...why no cash accounting support?

Let's be clear: ManagePLUS produces accrual-based accounting reports. Accrual reports are the only accurate way to consider business profitability for a particular period of time.

The good news is: This does not mean you must do accrual accounting in QuickBooks to use ManagePLUS. Cash accounting records will work just fine. But most people who think they're keeping cash accounting records in QuickBooks are actually doing a form of mixed cash/accrual accounting without even realizing it. This topic explains why, so you'll understand possible differences between ManagePLUS' reports and the cash basis accounting reports you might prepare in QuickBooks.

ManagePLUS and Accrual vs. Cash Accounting

What's the Difference?

•	In cash accounting, income and expenses are assumed to have occurred when cash is received or paid. In terms of how you use QuickBooks: with cash accounting, all income and expenses are recorded using Checks, Deposits, and Sales Receipts.

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In accrual accounting, income and expenses are assumed to have occurred when goods are transferred or services rendered to your customers or by your suppliers, regardless of when cash changes hands (regardless of when things are actually paid for).

In terms of how you use QuickBooks: with accrual accounting, income and expenses may additionally be recorded using Invoices and Bills. Both of these QuickBooks forms should be used when goods have been transferred or services rendered but no cash has changed hands. An Invoice records a sale to a customer, for which the customer still owes you (an account receivable). And a Bill records a purchase from a supplier, for which you still owe (an account payable).

Accrual accounting actually involves more than just using Bills and Invoices to enter transactions. Especially, it involves considering some things to be a purchase of inventory (an asset) instead of just "expensing" the purchase. For example, if a farmer who keeps cash basis records buys fertilizer at year's end for the following year's crop, the fertilizer would be treated as an addition to inventory, not an expense (even if he intends to "expense" the fertilizer for tax purposes). The fertilizer inventory would then be considered expense in the year when the fertilizer was used on a crop. The point is that keeping accrual records with any accounting system involves recording income and expense when it is incurred, regardless of when cash is received or paid.

Mixed cash/accrual accounting in QuickBooks

If you are a cash basis record keeper who also uses Bills or Invoices, then you are really doing a form of mixed cash/accrual accounting.

Normally a cash-basis record keeper would record expenses by entering a Check, because a check records both the expense and the transfer of cash—a deduction from your checking account—as of the same date. But if you enter an expense as a Bill you are recording the expense as of the date of the Bill, though the transfer of cash (paying the bill) won't happen until later—maybe next month or even next year.

And that's where confusion can arise. Suppose sometime in December you enter a Bill for $2,000 in supplies, and don't actually pay the bill until January. If you prepare a cash basis profit and loss report in QuickBooks, the $2,000 expense will show in January (when you paid the bill). But if you prepare an accrual profit and loss report, the $2,000 expense will appear in December. Why? Because using the Bills form recorded the expense as of when it was dated, regardless of when you may pay the bill.

This isn't a problem for preparing cash basis accounting reports in QuickBooks, as QuickBooks can automatically "back out" accrual transactions for cash basis reporting purposes, so that income or expense won't appear until the Bill or Invoice is actually paid. So a cash basis Profit and Loss report or Tax report from QuickBooks will show the expense where a cash basis record keeper would expect to see it.

But ManagePLUS does no such automatic adjustment from accrual to cash. In fact, our long run goals for ManagePLUS are in the opposite direction! We will continue adding features for adjusting cash accounting records to an accrual basis, to assist our cash basis customers with getting the accrual-based information they need for evaluating business profitability.

OK, so what does that mean for me?

If you use Bills and/or Invoices—accrual accounting features—in QuickBooks, your reports in ManagePLUS won't always match up with cash basis reports you prepare in QuickBooks. As in the $2,000 supplies example above, income and expense will appear as of the Bill or Invoice date, rather than the date on which the Bill or Invoice was paid.

Eventually the value of this approach will be clear, when ManagePLUS has more complete business analysis capabilities. For now, it only means you need to understand the difference in how ManagePLUS prepares reports.

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