Making Sense of the QuickBooks Accrual Accounting Option – Week #42 of The Financial Operating System®

In the previous chapter, we explored the differences between accrual and cash accounting, highlighting how accrual accounting provides a clearer picture of financial health. And how the cash flow statement complements it by reconciling cash movements with economic activity. Here we will explore how QuickBooks uses its accrual-basis reporting option so that you can understand. What more may be required to produce true accrual-basis reports for your business.

Key Features of Accrual-Basis Reports in QuickBooks:

1. Revenue Recognition:

   • Accrual-basis accounting specifies that revenue is reported when goods are delivered or services are rendered. Regardless of when invoiced or when payment is received.
   • In accrual-basis reports in QuickBooks, revenue is reported based on the invoice date without regard to when goods and services are delivered.
   • For example, if you deliver services in May and invoice the client in early June with a June invoice date, then QuickBooks reports the revenue in June. True accrual accounting would report the revenue in May when services were delivered.
   • If you utilize the Management Accrual practices described in Chapter 27, then QuickBooks reports will be accurate for revenue.

2. Expense Recognition:

   • Accrual-basis accounting specifies that expense is reported when goods and services are received, regardless of when invoiced or when you pay vendors.
   • In accrual-basis reports in QuickBooks, expense is reported based on the bill date without regard to when goods and services are received, (or on the credit card charge date or payment date if there is no bill entered).
   • For example, if you receive services in October and receive a bill dated in early November, then QuickBooks reports the expense in November. True accrual accounting would report the expense in June when services were received.
   • If you utilize the Management Accrual practices described in Chapter 27, then QuickBooks reports will generally be accurate for expenses except for any large vendor bills for future deliverables spanning more than one month. 

3. Accrued Revenue and Expense:

   • Accrual-basis accounting incorporates activity such as deferred revenue (advance payments received for services to be rendered in the future). Or prepaid expenses (costs paid in advance) offering a more accurate representation of financial performance.
   • Provided these activities are posted to QuickBooks via journal entry, they appear on accrual-basis reports based on the journal entry date.
   • QuickBooks does not have a feature to manage revenue and expense schedules. You must maintain spreadsheets or use another system outside QuickBooks to do this accounting.

Limitations in QuickBooks’s Accrual-Basis Reports:

1. Hybrid Nature:

   • QuickBooks “accrual-basis” reports are not accurate in terms of true accrual accounting.
   • They rely on invoice dates for revenue and bill dates for expenses. But they don’t automatically adjust for accruals like revenue recognition over time (e.g., for milestone projects).
   • If you post manual revenue and expense adjustments via journal entry, then QuickBooks reports conform to accrual accounting.

2. No Automated Accrual Rules:

   • QuickBooks doesn’t apply accrual accounting rules like revenue and expense recognition schedules automatically. The user must calculate and input these monthly amounts manually. This requires a skilled accountant.

Takeaway:

QuickBooks’ accrual-basis reports are really more of a hybrid between cash and accrual accounting. If you can follow the Management Accrual Accounting guidelines in Chapter 27. Then your QuickBooks reports will be pretty close to true accrual accounting. If you can’t follow those guidelines due to the nature of your business, then you won’t be able to rely on QuickBooks. To provide accurate accrual-basis reports and will need an accountant to manage accrual accounting for you.

Next Step:

Business owners can self-implement The Financial Operating System. Chapters are available to download at smartbooks.com/resources or you can buy the whole book from Amazon (the marketing firm version or the general business version).

If you would like assistance with implementation or would like to accelerate results for your business, please contact author Cal Wilder at cwilder@smartbooks.com or book a free consultation with our team directly using this calendar link.