Every company has to make a choice between using cash and accrual method for their bookkeeping. Sometimes this choice is made for us, dependent on IRS rules, but overall there are a few pros and cons to consider when making the decision…
The simplistic difference between the two is that cash method recognizes revenue when it receives payment and expenses when payment is made. Accrual accounting matches revenue and expenses regardless of when payment is made or received. Cash method gives you a more clear picture of your cash position, however, accrual shows the flow of income versus debt.
Most businesses end up using both methods so that they can have a better understanding of what the numbers truly mean – knowing how healthy cash flow is, as well as understanding spend versus revenue. It’s important to note that once your business has more than $5 million per year in sales or carries more than $1 million per year in inventory, the IRS requires that you use the accrual method as your primary accounting method.
For any business, tracking expenses is non-negotiable. A large part of business expenses are tied up in employee purchases, whether a reimbursable expense or a corporate card transaction. More often than not, employee purchases are recorded on a cash basis, regardless of the accounting method used, because of restrictions put on the finance team, whether by way of time or context. Meaning that the expense is allocated to the month an expense report is submitted and payment or reimbursement is made. However, they should be recorded in the same method that you record your other business expenses in order to keep your records in Xero consistent for better reporting or in case of an audit.
This article will discuss the challenges finance teams face when recording employee expenses when they use the accrual method and the best practices for overcoming those challenges.
Challenges & Best Practices
The biggest, overall challenge in recording expenses in accrual method revolves around the ‘expense report’ – a foundational element of the traditional expense management workflow.