A free sample from chapter 2 Accounting Fundamentals of our Landlord / Property Management in QuickBooks guide. Section 2.13 Cash Accounting, not Accrual. We hope you’ll become a customer today, or sign up for the free e-course.
Two methods exist in tracking income and expenses. Each can be recognized as they are earned/incurred (accrual method), or recognize them as they are actually deposited/paid (cash accounting). Cash accounting is used in this book.
Accrual Accounting records financial events in the period they are incurred. Even if cash is not received or paid in a transaction, they are recorded because they are significant to the future income and cash flow of the company. If you record an income event on the day rent is due, and not when it is received, that is accrual accounting.
Cash Accounting records financial events based on cash flow. Revenue is recognized when cash is received and expense is recognized when cash is paid.
The distinctions appear if you incurred an expense (were billed) at the end of December, although did not pay until the 5th of January. Accrual accounting would recognize the expense and enter an accounts payable entry in the previous year but not reduce your cash and liability account until January. Cash accounting lumps those two transactions into one, reducing cash and recognizing the expense on January 5th.