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Accrual vs. Cash Accounting
Gary W. Ware | |
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Whether to use cash or accrual accounting is a decision all business owners must make. Optometrists usually do not even think about whether to use accrual or cash accounting in their practices, although they should, according to Gary W. Ware, a consultant to optometry practices. Which method is better for optometry practices? That depends largely on whether the practitioner would prefer to have the simplicity of cash basis accounting or the most accurate possible barometer of practice performance. Whichever a practitioner determines to be best, now is the time to make any changes. Businesses must report which form of accounting they use to the Internal Revenue Service during a given tax year.
Until just a few years ago, practitioners were not supposed to have a choice in the selection of an accounting methodology.
IRS requirements stipulated that optometric practices with inventory - the huge majority of optometric practices - had to use accrual basis accounting. However, a number of optometric practices were using cash basis accounting anyway, according to Ware. That is because many felt cash basis accounting was the method most applicable to optometric practice, according to Dan Sills, chief financial officer for AOA. (The IRS rules allowing use of cash basis accounting apply to tax years ending after 1999. Fortunately, for any practitioners who might have been using it in the past, the IRS also announced it would not challenge its use in earlier years, if used consistently.) |
Today most optometric practices, especially medium and small ones, remain on a cash basis, Ware reports. However, he believes the IRS may have been giving practitioners some good advice when they effectively required them to use the accrual method. Accrual accounting is now the method most commonly used by businesses across the board. Ware has been actively encouraging his consulting clients to use accrual accounting, contending it provides practitioners the best means to recognize and track changes in the practice. However, Sills and proponents of cash basis accounting point out that there is a small tax advantage associated with staying on a cash basis rather than switching. So, what are the differences? Basically, cash and accrual accounting differ only in the timing of when transactions, both revenue and expenses, are credited or debited to the practice accounts.
Cash Basis In the cash method, revenue is counted when funds (cash, check, or credit card transaction) are actually received. Likewise, expenses are counted when they are actually paid, not when the practice "buys" something. This timing means that only money that shows up in a year is counted as revenue, even if additional money is expected but has not yet arrived. Expenses are counted as deductions when actually paid, regardless of when the practice committed to the expenditure. Cash basis accounting is simple, easy to understand, and does not require allocation of revenue or expenses to various periods. |
