Getting Started > Initial Decisions > Cash-basis or accrual accounting
Cash
Basis or Accrual Accounting (Getting Started)
How
Do I...
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.
For more information on the differences in these accounting methods, click here.
Please note that 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.
Accrual accounting is the more common and accepted method.
Related topics
How
Sage 50 handles cash basis
The benefits of cash-basis
accounting
The benefits of accrual
accounting
Example of cash vs.
accrual accounting
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