How to switch between Cash basis and Accrual accounting and why we run both by default

Sunrise is fundamentally an Accrual Accounting system but defaults all new organizations to your primary financial statements’ cash-basis view. 

What is Cash-basis and Accrual-basis accounting?

The difference between Accrual and Cash accounting is a matter of timing. If you recognize your revenues when you send an invoice (i.e., with an Accounts Receivable), that’s Accrual. If you realize your revenues when you get paid for an invoice, that's Cash Accounting. 

Cash Accounting is most common for businesses with no inventory, such as services businesses. The method of accounting used has considerable implications for when you report your taxes. 

For example, if you send an invoice for $10,000 at the end of the year that is still unpaid, your taxes will look very different the following year, depending on your accounting method. In Cash Accounting, that invoice doesn’t show up as income, and so you won’t have to pay taxes on it. But, with Accrual Accounting, you will pay taxes on that income, even though you haven’t been paid yet. 

How to switch to a full Accrual-basis on your financial statements

To revert your Profit & Loss and Balance Sheets to a full accrual-basis, head on over to your Settings > Organization and select Accrual > Save.

Why Sunrise defaults to Cash-basis reporting 

Most small businesses and certainly most service businesses report their taxes on a Cash-basis. The IRS makes it very difficult (if not nearly impossible) to legally alternate between these two systems. So you don’t want to be casually switching between the two when reporting your taxes.

To ensure that your tax reporting is consistent from year to year, Sunrise allows you to switch between the two accounting methods, so Sunrise matches how you report your taxes.

Many small business owners are not trained accountants, and cash-basis is the simplest and easiest to understand method for thinking about your income, expenses, assets, and liabilities. When you get paid, you have income. When you pay for something, you have an expense. Simple. And making your money simple is our mission. 

Why Sunrise fundamentally runs as an Accrual system

So if Cash-basis is so great, why run Accrual at all?

Cash-basis doesn’t help when you’re making management decisions since you have only a day-to-day view of finances. With Accrual, you’ll know who you’ve sent an invoice to that has yet to pay it. Or if you have a bill to pay this month and want to make sure your net income reflects the pending operational cost. 

Put merely; Accrual gives you a better view of your business’s actual performance because it shows when income and expenses occurred. If you want to see if a particular month was profitable, accrual will tell you. Whereas cash will just show you if you have money in the bank or not. As you know, money in the bank doesn’t necessarily mean you are profitable. 

Based on that, Sunrise's dashboard still shows you these Accrual details for better business management while still offering Cash-basis financial reports for your taxes.