You have done work for your clients and you sent them a bill, but if you use the cash method of accounting how do you account for these unpaid invoices? Technically, under the cash basis we only record revenue when a client pays us for services performed. But even true cash basis companies may perform work before receiving payment from customers. Therefore, it is okay to use a combination of the accrual and cash methods to track items such as accounts receivable and accounts payable. The key is to adjust your revenues at the end of the year for any account receivables recorded but not yet paid.

When we are use the cash method we would not record any entry until the payment has been received:

Cash                 10,000
    Produce Revenue     10,000

However, when we use the accrual method of accounting a journal entry to record an invoice sent to a customer may look like:

Accounts Receivable - ABC Produce    10,000
    Produce Revenue                      10,000

When we use cash basis it is common for customers not to pay us immediately. So we want the ability to track the amounts our customers owe us using accounting software. We also want to be able to track what we owe to our vendors to ensure we make timely payments. Therefore, a use of the “hybrid” method allows us the best of both methods.

Thankfully this is fairly easy, especially if you are using Quickbooks or another accounting software program. You don’t really even need to understand the differences between cash and accrual accounting as the software will do all the work for you. When you go to the reports drop-down option in Quickbooks and select any of the financial statements a box will open with options, such as the time period you want to review. Within that option box is an option to check “cash” or “accrual” boxes. The software is smart enough to produce an Income Statement (aka Profit and Loss Statement) that is either cash OR accrual based.

At the end of the year we need to make sure that the financial statements report our activity using the cash basis. Otherwise, we would pay taxes on income we have not received. Additionally, the IRS requires a formal change from cash to accrual or accrual to cash using Form 3115, Application for Change in Accounting Method. A business cannot switch between the methods as we see fit, therefore, we must make sure that if we use the hybrid method, our Income Statement and Balance Sheet report using the appropriate accounting method, i.e., either cash basis for accrual.