Cash Basis or Accrual Accounting (Getting Started)

When you set up a company in Sage 50, one of your choices is between cash-basis and accrual accounting.

In cash-basis accounting, you recognize income and expenses when you receive cash.
In accrual accounting, you recognize income and expenses when you send or receive an invoice. In other words, accrual accounting recognizes future receipts or disbursements, based on the reasonable expectation of cash flow.

Thus, in accrual accounting, you have Accounts Receivable and Accounts Payable account types.

The sum of your Accounts Receivable account(s) equals the sum of open invoices with customers.
The sum of your Accounts Payable account(s) equals the sum of open bills you have with suppliers (vendors, in Sage 50 terminology). In cash-basis accounting, you would not need these types of accounts.

Note: Accrual accounting is the more common and accepted method.

For more information on the differences in these accounting methods, click here.

Note: If yours is an established business, you may not have a choice. The Internal Revenue Service has strict rules about switching between cash and accrual accounting. The switch must be made at the beginning of your fiscal year, and you must advise the IRS. Consult your accountant or tax-preparation professional if you're considering this switch. For those reasons, Sage 50 will not let you switch between methods once you have established a company. If you do decide to change methods, you would have to set up a new company.

Example of Cash vs. Accrual

The difference in net income for a company can be large, depending on the accounting method. In this example, the choice of cash versus accrual means the difference between profit and loss for the period.

A small service company invoiced $10,000 in September, but received only $5000. Their total purchases were $8000, but they deferred payment on $2000 of that.

Account Type	Cash-Basis	Accrual
Income	$5,000	$10,000
Expense	$6000	$8000
Net Income	- $1000	+$2000