FAQ: What is the difference between accrual and cash-based accounting?

When filtering the All Sales Report, you can choose to filter by two accounting methods: accrual and cash. Below are explanations of accrual and cash-based accounting.

Accrual-based accounting

Accrual-based accounting tracks a sale from the day a client purchases an item from your business. This means that all revenues are recorded when they are earned and all expenses are recorded when they are incurred, with the expectation that money will be paid in the future. Revenues are considered earned when your business provides the client with the product or service they have paid for. Purchases made on account, with a gift card, through a partner like ClassPass, or any other delayed payment/redemption, will all show on the day the client redeems the service, not when someone buys the pass used to pay for it.
 
For example:

A customer purchases a $25 gift card at your business on January 1, and redeems the gift card for a $25 item at your business on January 10. Accrual-based accounting would record a sale for $25 on January 10, but no sale would be recorded on January 1, because the revenue is not earned until the client makes a purchase with the gift card.
 

Cash-based accounting

Cash-based accounting tracks a sale from the day your business received payment for it. This means that all revenues are recorded when they are received and all expenses are recorded when they are paid. This method makes it very easy to track the cash flow of your business, but does not account for any receivable or payable sums that have not yet been paid.
 
For example:

A customer purchases a $25 gift card at your business on January 1, and redeems the gift card for a $25 item at your business on January 10. Cash-based accounting would record a sale for $25 on January 1, but no sale would be recorded on January 10, because no money was received.

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