Cash-Basis Accounting
Cash-basis accounting is one of the two most common ways of keeping track of a company's revenues and expenses. The other method is accrual-basis accounting.
With cash-basis accounting, revenues are recorded in the accounts when cash is received from customers, and expenses are recorded in the accounts when cash is paid out, regardless of when sales or purchases are invoiced. However, the program updates your vendors, customers, and inventory and services records as soon as you make an entry. These records are always up to date.
Note: Cash sales and purchases in the Sage 50 Accounting program are not related to cash-basis accounting. If you pay an invoice at the time of purchase, it is a cash purchase. If the customer pays at the time of the sale it is a cash sale, no matter what type of accounting is used. Expenses or revenues are recorded in the accounts at the time of a cash purchase or sale, in both accrual-basis and cash-basis accounting.
If you are using cash-basis accounting, do not turn it off to make an accrual-basis entry. Enter a transaction with a date earlier than the Cash Accounting Date instead.
To start using cash-basis accounting
Step 1: Decide
whether to change from Accrual to Cash-Basis Accounting
The decision to use cash-basis accounting requires careful consideration. Check with your accountant. If you want, you can switch to cash-basis or to accrual-basis accounting at any time, though you should make this decision carefully.
Some of the things you should consider include:
- Once you change to accrual-basis accounting, you cannot change your existing transactions back to cash-based transactions if you decide to change back to cash-basis accounting.
- Changing from cash-basis to accrual-basis accounting might cause some confusion when you examine entries for the period during which you switched methods.
- You will have to change some accounts when performing certain sales transactions such as entering credit memos, early-payment discounts, writing off bad debts, and recording NSF cheques.
- If you make a mistake when entering a transaction, you must manually void it (it is not possible to adjust transactions in cash-basis accounting).
- You will need to print unpaid transactions reports regularly to keep your business running smoothly.
Step 2: Change
from Accrual to Cash-Basis Accounting
Once you have decided to switch:
- (Optional) Make a backup of your company files.
- In the Home window, on the Setup menu, choose Settings.
- Click Company and then System.
- Select the Use Cash-Basis Accounting option.
- Enter a Cash Accounting Date. This is the date on which you want to begin cash-basis accounting, the cut-off point that divides your accrual-basis entries from your cash-basis entries.
- Click OK.
Note: If you must enter an accrual-basis transaction, date it earlier than the Cash Accounting date. The program treats a purchase or a sale dated earlier than the Cash Accounting date as an accrual-basis entry, and updates the related accounts immediately.
If you must enter an accrual-basis transaction, date it earlier than the Cash Accounting date. The program treats a purchase or a sale dated earlier than the Cash Accounting date as an accrual-basis entry, and updates the related accounts immediately.
After you start using the cash-basis accounting method, you should not change the Cash Accounting date. You may end up with an unexpected mixture of cash-basis and accrual-basis entries in the same time period. Similarly, be sure you do not mix cash-basis and accrual-basis entries in the same time period as a result of changing from one method to another.
Step 3: Finish Entering History (if you haven't already done so).