Cash Or Accrual? Which Is Better For Nonprofits

Is cash or accrual accounting better for nonprofits? Well, you may not even know what those words mean. Allow me to explain!

What's The Difference?

The most accurate financials you can get are accrual-based financials, accrual accounting records transactions when they occur.

Whereas cash-based accounting records transactions when cash is exchanged from one hand to another.

The advantages of Accrual Based accounting

First, it is the most accurate set of financials you can get because it is a complete picture of all the income and expenses related to a set period, regardless of when cash exchanges hands. 

It will give your leadership a clear picture of the financial position and the organization's health. So it's ideal. Also, it's an accounting concept that aligns with generally accepted accounting principles (GAAP) with is required for audited financial statements.   

You're going to need to achieve accrual reporting in order to comply when you begin receiving an audit of your financial statements. I have more on that in another blog post. So check that out here.

The disadvantaged to accrual-based accounting

 The disadvantage to accrual-based accounting is that you will need a more skilled staff and accounting system. 

You might want to leave QuickBooks when you get here. There are a few workarounds, and you'll improvise for a while, but eventually, you'll find yourself wanting a more robust accounting software.

The Takeaways:

• Requires high level of staff skill
• Need more robust accounting software

When To Use Accrual Based Accounting Software?

If you're required to have a financial statement by an independent CPA, then you need to get started now on accrual accounting.

• Amount due to you but not collected – receivables.

Some areas that may make sense to begin with are in your income area. Maybe you have revenue from a grant, and the funding commits to a 12-month commitment that pays annually or quarterly, but you earn it monthly.

Then you would use accrual basis accounting to book your receivable amount. The accrual entry book it every month as an increase in accounts receivable and a credit to the revenue account, showing that revenue in your income statement for the period.

 Once you collect it, the money goes into the bank debit to the cash account and a credit to that receivable account. This will allow your board and leadership to see what's delayed and delinquent in payments you have earned. 

• Area of expenses, where credit cards are commonly used.

I recommend that the credit card charges get recorded throughout the month as expenses with an increase to the credit card liability or credit card payable account.

Then, when you get your credit card statement, you reconcile that statement to the transactions inside that credit card's liability account to determine that all charges are recorded in the financial system.

When you pay it, the account will zero out. This helps you to ensure all charges on your credit card are in your accounting system. And the total bill is paid in full at the end of a billing cycle.

• When goods and services are received.

 Generally, goods or services are received, and later we get an invoice. There’s a delay between those two things and it may be something you don’t pay for 30 days.

You want to get to a place where you're recording all known expenses as they come in. So, in this case, you would debit the expense accounts, credit the accounts payable.  This will show all invoices that have been received but not yet paid.

Reconcile that Accounts Payable list at the end of every month end close to ensure that the balance in accounts payable is equal to actual outstanding invoices.

These examples put you in a place of what's called a modified accrual. So not full accrual yet, but you're making progress.  You're not doing all cash accounting; you're doing some accrual.

I hope you found this article helpful and use it a starting place for moving towards more accurate and complete financial reports.