Background
Recording Transactions for Cash Basis Reporting
Generating Cash Basis Reports
Exceptions to the General Cash Basis Rules

Background

In cash basis accounting, generally you realize income or expenses on the day you receive payment or pay a bill. In accrual basis accounting, you realize income or expenses on the day you record the sale or purchase, regardless of whether a payment is made.

For instance, in January, you sell $200 worth of products to ABC Company, but they don't pay you until March. In accrual basis accounting, the income from the sale is realized in January, the date of the sale. In cash basis accounting, the income would be realized in March, the date the payment was received.

Beyond that general rule, there are many exceptions (exceptions which create complexity and make it nearly impossible to encompass in an accounting software package). At the bottom of this article you'll find several examples of exceptions.

Recording Transactions for Cash Basis Reporting

The Accounting software is designed to work most efficiently in the accrual basis; all you need to do is click the Record button after you've entered a transaction in the Sales or Purchases windows. However, you can use the Order Status to operate in cash basis accounting.

To record transactions using the cash basis, enter your invoices and purchase orders as usual, but use the Order status instead of Invoice status to record the transaction.

When a transaction you've entered is paid by a customer, or you pay a vendor, you can change the Order to an Invoice. To do this:

1. Go to Enter Sales/Purchases
   
2. Enter the customer's or vendor's name
   
3. A list containing all pending transactions for that customer or vendor appears. Choose the transaction you want from the list and click the Use Pending button
   
4. Change the date of the transaction so it reflects the date the payment was made, then click Record.

After the transaction is recorded, use the Bill Payments or Customer Payments windows to enter the payment.

Generating Cash Basis Reports

To see how much money customers owe you, select Index to Reports from the Reports menu. Double-click the Sales (Customer Summary) Report from the list in the Index to Reports window. The Report Selection window appears. Mark the All Customers selection and select Orders from the Invoice Status list. Make your own choices for the remaining selections in the window and click OK. The Index to Reports window reappears. Click Display to view the report on your computer screen. The report will show the balances of all open sales.

To see how much money you owe to vendors, select Index to Reports from the Reports menu. Double-click the Purchases (Vendor Summary) Report from the list in the Index to Reports window. The Report Selection window appears. Mark the All Vendors selection and select Orders from the PO Status list. Make your own choices for the remaining selections in the window and click OK. Click Display to view the report on your computer screen. The report will show the balances of all open purchases.

For futher information regarding cash basis reporting in AccountEdge please see this article.

Exceptions to the General Cash Basis Rules

Below are some examples of exceptions to the cash basis rules. These are not all encompassing and there are many other exceptions. Check with your accountant on how to handle these as they are in the best position to advise you.

Example 1
Your customer calls you in December this year, that they have a check for you. You tell them to hold the check & you will pick it up in January of next year. When do you record income?

You record the income in December of the current year. See Publication 334 pages 12 & 13 - Constructive Receipt.

Example 2
You buy a 2 year subscription to a magazine for $120 in October and you pay the bill in October. When do you claim this expense?  

You record the expense as follows:

• October - December of the first year: $15
• January - December of the second year: $60
• January - September of the third year: $45

This does not fit the 12 month rule. See Publication 538 Page 9 & Publication 334 Page 13.

Example 3
You go to Staples in December and charge $200 for office supplies on your Amex card. You pay the Amex card in January next year. When do you claim this expense?
      You claim this expense in December of the current year. See Publication 502 page 3.

If you use a credit card, include medical expenses you charge to your credit card in the year the charge is made, not when you actually pay the amount charged. This holds true for business as well.

Example 4
You go to Staples in December and charge $200 for office supplies on your Staples Revolving Credit account. You pay the Staples in February next year. When do you claim this expense?

February of next year. The Staples account is different from the Amex account. You still owe Staples here and Staples will not be paid until you pay the bill. If you charged it on Amex, Staples is paid by Amex when you charged it not when you pay Amex.

Example 5
You write a check in December and mail it in January. When do you record this expense?

You would record this expense in January.

Example 6
You called in to pay a bill/paid a bill online in March and reported it to your financial institution in April. When do you record the expense?

You record this in April as that is when you reported the payment. See Publication 502 Page 3.

Note:
You can include only the medical and dental expenses you paid this year, regardless of when the services were provided. If you pay medical expenses by check, the day you mail or deliver the check generally is the date of payment. If you use a “pay-by-phone” or “online” account to pay your medical expenses, the date reported on the statement of the financial institution showing when payment was made is the date of payment. If you use a credit card, include medical expenses you charge to your credit card in the year the charge is made, not when you actually pay the amount charged.

The same holds true for business expenses.

As noted earlier there are other exceptions and you should check with your accountant on them.