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Accounting methods - cash and accrual

This article applies to:AvaTax

An accounting method is a set of rules used to determine when and how to report income and expenses in a company’s books and on income tax returns.

The two most common accounting methods are:

  • Accrual accounting
  • Cash accounting

The accrual accounting method is more common, and some businesses are required to report revenue using the accrual accounting method. If you aren't sure which accounting method your business should use, Avalara recommends first consulting a tax professional, such as a CPA or tax attorney.

Accrual accounting

Businesses using this record transactions when they occur rather than when cash changes hands. Similarly, expenses are recorded when the expense incurs rather than when the invoice is paid.

For example, a business ships a product to a customer. The business records revenue (including the sales tax that was collected) when the product is shipped, although payment has not yet been received.

Accrual accounting method is fully supported in AvaTax and Managed Returns.

Cash accounting

Businesses using this accounting method do not report revenue until payment has been received. Similarly, expenses are recorded at the time they are paid.  

For example, a business ships a product to a customer. The business does not record the revenue until they have received payment from the customer.

Cash accounting is not supported in AvaTax or Managed Returns, because most business applications calculate tax and commit transactions at the time the transaction is shipped, rather than when a payment is made.

It is possible for you to make manual adjustments to your transactions, moving them forward for cash-basis accounting. This is not recommended, because it is only possible through manual adjustments and can create discrepancies in the tax amount collected vs. charged the client. For example:

  • Avalara calculates tax based on the tax date on the invoice, which is typically the same as the document date.
    This is generally when the transaction has been shipped, and does not necessarily mean that payment has been received.
  • Avalara reports tax based on the document date.
  • The business application does not update the transaction in AvaTax when a payment is made, which means that Avalara reports do not reflect the payment date.

To report revenue using the cash accounting method, you would need to:

  1. Change the transaction status of any unpaid invoices to Uncommitted.
  2. Once the transaction has been paid, change the transaction document date to the filing period in which you want the transaction to be reported.
  3. Save the transaction as Committed to make sure that it's reported.

This process is not recommended because of the number of manual adjustments involved.

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