One of the most confusing parts of accounting (besides debits on the left, credits on the right) is the timing of when to record transactions. Accountants are very particular about when transactions should be posted…especially at the end of the year. The basis…cash or accrual…will determined when transactions are posted.
Why does this matter? Even if you are not an accountant, it’s probably more important for you to know your churches actual financial position. When you are inconsistent with the timing, the financial picture becomes blurred and the reports more difficult to trust.
In the video, I show you exactly how to change the accounting basis for an individual report or for the church as a whole. In this article, I’ll do my best to explain the differences as well as the Pros and Cons.
Cash Basis
- What is it? Income and Expenses are recorded on the day you receive money or make a payment. For income, you would record it the day of the offering…usually Sunday…even if it wasn’t deposited until later in the week. For expenses, they are recorded the day the check is cut, the card is swiped, or the payment is submitted electronically.
- Pros: Easiest to understand.
- Cons: Expenses can be…manipulated. If I want 2024 to look better, I can hold off until January 2025 to make a payment. You can also do the opposite. I can pay bills that are due in January in December. These kind of manipulations can obscure the true financial position of the church.
Accrual Basis
- What is it? Income and Expenses are recorded on the day earned or incurred. For income, you would still record it the day of the offering…usually Sunday…even if it wasn’t deposited until later in the week. For expenses, what does it mean to incur an expense? Technically it means that you would record the expense the day you receive the goods or service. For practical reason, I usually go by the date of the invoice. Sometimes with utilities that cross over a month, I’ll just record it in the month covered by the most days. Example, I receive the water bill dated June 5th which covers water used from May 4 – June 3. I would typically just record this in May and not worry about splitting it between two months. As long as I’m consistent, it shouldn’t matter.
- Pros: More accurate…precise. Your financial reports should be more trustworthy.
- Cons: This can be confusing. Also, you can really get bogged down trying to get things perfect. If you find yourself spending way too much time on this…perhaps you need some exceptions like I mention above.
Modified Accrual
- What is it? Usually for a church, this is when they are mostly Cash Basis, but there are some exceptions. One of the churches that I served was Cash Basis except for payroll. To give folks time to turn in time sheets, they were paid a couple of days after the close of the month. We applied these back. The key thing is to document these exceptions as part of the rules.