10.3 and 3.1 Definition and Examples of Cash-Based Accounting vs. Receivables-Based Accounting
Problem
The Static Parameters profile Fiscal Settings group has a G/L Post Option field that offers Cash and Receivables (Required for Accrual). What's the difference?
Solution
In very general terms, the difference between a Cash-based accounting system, a Receivables-based accounting system, and a Receivables/Accrual-based accounting system is in how revenues are earned and reported on income statements. The following provides a simple example of each accounting system.
Cash-Based - In a Cash-based accounting system, revenues are earned and reported on income statements at the moment the payment is received.
For Example: You have a CPR Certification activity on 09 April. Registration Fees are $50.00. Clara Barton and Florence Nightingale sign up for the program on 26 March. Clara pays the Registration Fee when signing up. Florence does not. $50 of revenue for the CPR activity is earned on 26 March and your deposit for that day includes Clara's $50.00. Florence Nightingale does not pay the Registration Fee until 20 April, two weeks after the fact. $50 of revenue for the CPR activity is earned on 20 April and your deposit for that day includes Florence's $50.00.
Receivables-Based - In a Receivables-based accounting system, revenues are earned and reported on income statements at the moment of purchase regardless of whether a payment is made. At the moment of purchase, your Receivables account is debited the amount of the purchase and your Earned Income account is credited. When patrons remit for the purchase, the Receivables account is credited by the amount of the payment and the payment is included in that day's deposit.
For Example: You have a CPR Certification activity on 09 April. Registration Fees are $50.00. Clara Barton and Florence Nightingale sign up for the program on 26 March. Clara pays the Registration Fee when signing up. Florence does not. $100 of revenue for the CPR activity is earned on 26 March because that is the purchase date. Receivables is debited $100.00 and Earned Income is credited $100.00. Receivables is credited $50.00 for Clara's payment (for a net $50.00- to Receivables for the two enrollments) and your deposit for that day includes Clara's $50.00. Florence Nightingale does not pay the Registration Fee until 20 April, two weeks after the fact. $0.00 of revenue for the CPR activity is earned on 20 April (Revenue for Florence's enrollment was realized on 26 March when she registered) but your Receivables account is credited $50.00 (for a net $0.00 to Receivables for the two enrollments) and your deposit for that day includes Florence's $50.00.
Receivables/Accrual-Based In an Accrual-based accounting system, revenues are unearned from the time of purchase until the service is provided. Once the service is provided, you run Accrual Processing and money moves from Unearned Revenue to Earned Revenue in increments equal to the time over which the service is provided. At the moment of purchase, your Receivables account is debited the amount of the purchase and your Unearned Income account is credited. When patrons remit for the purchase, the Receivables account is credited by the amount of the payment. When Accrual is processed, money moves from Unearned Income to Earned Income provided Accrual is run on or after the date of the service being purchased. Payments toward the service are included in the day's deposit whenever they are made.
For Example: You have a CPR Certification activity on 09 April. Registration Fees are $50.00. Clara Barton and Florence Nightingale sign up for the program on 26 March. Clara pays the Registration Fee when signing up. Florence does not. $100 of revenue for the CPR activity goes to your Unearned Income account on 26 March because that is the purchase date. Receivables is debited $100.00 and Unearned Income is credited $100.00. Receivables is credited $50.00 for Clara's payment (for a net $50.00- to Receivables for both enrollments) and your deposit for that day includes Clara's $50.00. On 01 April you process Accrual for the period 01-31 March. $0.00 for the CPR program moves from Unearned to Earned because the service has not been provided. The class is held on 09 April. Florence Nightingale does not pay the Registration Fee until 20 April, two weeks after the fact. Your Receivables account is credited $50.00 (for a net $0.00 to Receivables for the two enrollments) and your deposit for 20 April includes Florence's $50.00. No other money moves. On 01 May you run Accrual Processing for the period 01-30 April. $100 moves from Unearned Income to Earned Income and revenue for the CPR class that took place on 09 April, which is included in your Accrual Date Range, is realized.
Generally speaking, most departments use Cash-based accounting. Contact VSI Support for answers to more specific questions.
See Also: Topic Doc - Accrual and Examples