I get this question quite frequently from floor covering stores using QFloors/QPro for the first time. The short answer to this question is that in the floor covering industry, cash basis accounting is not as accurate as accrual accounting. (I’ll explain why this is the case a little bit later.)
But first, if you currently use cash accounting and want to continue—or if your accountant prefers it—you should take a moment to ask yourself (and your accountant): Why did you choose cash basis accounting in the first place, and why are you still using it?
Likely, the answer is some form or combination of the following:
We were using a combination of QuickBooks™, other accounting systems, spreadsheets, manual systems, etc., which allowed us to use the cash basis of accounting. Since our business was small when we started, we opted to file taxes using the cash basis. Now, we’re comfortable with it and hesitant to make a change.
Often, through no fault of their own, business owners end up using cash basis accounting because their CPA started filing tax returns this way when the business was small. It was likely the quicker route back then. When using QuickBooks, you can switch between cash and accrual accounting, and the CPA might say, “Cash basis accounting is easier to do, so why not use it to file the taxes?” However, you or your accountant taking the easy road when your business is young and small can eventually cost you down the road.
For many floor covering businesses, these scenarios can set them on the wrong accounting path. The longer you wait to switch accounting methods, the harder it becomes—especially as your business grows.
Why is Accrual Accounting More Accurate and Appropriate for Floor Covering?
Accrual accounting has these advantages over cash basis accounting:
- Accurate financial picture: Provides a comprehensive view of financial performance, including appropriate timing of revenue recognition, future obligations, and receivables.
- Better long-term planning: Allows for accurate trend analysis and financial forecasting.
- Matching principle of accounting: Appropriate revenue recognition and corresponding Cost of Goods Sold for accurate Gross Profit calculations.
- Required for businesses with inventory: Since all floor covering businesses maintain inventory of flooring materials, this IRS rule often applies.
Weaknesses of Cash Basis Accounting in Flooring
- Inaccurate financial picture: Doesn't reflect future obligations or receivables, reflects revenue when paid, not earned, misrepresenting financial health.
- Difficulty tracking long-term performance: Makes it hard to analyze trends or predict future income.
- Doesn’t use the matching principle of accounting
- Not suitable for larger businesses: Generally not accepted for businesses with inventory or significant credit transactions.
Comparison Table
Here is a comparison table summarizing the key differences between cash and accrual basis accounting.
| Feature | Cash Basis | Accrual Basis |
|---|---|---|
| Revenue Recognition | When cash is received | When earned |
| Expense Recognition | When cash is paid | When incurred |
| Complexity | Simple | Complex (but QFloors automatically takes the complexity out of it) |
| Financial Picture | Immediate Cash Flow | Comprehensive financial performance |
| Suitability | Sole proprietorships and micro businesses without inventory | Larger and growing businesses, with inventory |
So What Now?
What should you do if your accountant doesn’t want to change the tax filing status from cash to accrual basis?
- The answer is you should use QFloors/QPro accrual basis accounting reports to evaluate and manage your business. Period.
- But if they are insistent on filing on a cash basis, when tax season rolls around, give your accountant the financial statements that QFloors produces and tell them to convert them to cash basis tax returns if they/you want to continue to file that way. It is an easy conversion for them (less than a half hour). If it’s not an easy conversion for them, you should get a new CPA/Accountant.
- You can have a set of tax (cash) books that your accountant keeps and you can also have a set of internal (accrual) books that you keep and manage your business with. Managing your business with cash basis books is misleading at best and potentially damaging to decision making.
Take financial control of your business by using accurate accrual based financial statements.
At QFloors, we offer accounting services to our customers and are happy to help. Reach out to see how we can get your financials on the right track.
