Every financial statement answers the question “when does something count?” one of two ways. On the cash basis, it counts when money moves. On the accrual basis, it counts when it is earned or owed, whether or not money has moved yet. Statements built from bank and card statements are cash basis by nature, because the bank only knows about money that moved.
What cash basis shows
Revenue when it was received, expenses when they were paid. The Profit and Loss is a true record of the money that came in and went out of the business in the period, after transfers between your own accounts and your own draws are taken out. The Balance Sheet shows cash on hand, what is owed on cards and loans, any equipment you list, and equity: what you put in, what you took out, and what the business earned.
What it leaves out
- Receivables: invoices you have sent and not yet been paid for.
- Payables: bills you have received and not yet paid.
- Inventory: goods bought and not yet sold, which cash basis treats as spent when paid for.
- Depreciation for the year, and other non-cash adjustments a preparer makes.
- Prepaid and deferred items: a year of insurance paid in December, a deposit received for next year’s work.
Who it is right for
Most sole proprietors, freelancers and small LLCs file their taxes on the cash basis, and for them a cash-basis statement is the right statement, not a lesser one. Service businesses with little inventory and short payment terms lose almost nothing in the translation. The people who need accrual are those whose receivables, payables or inventory are large relative to their revenue: a contractor with big unpaid invoices at year end, a retailer with a stockroom, a business with customer deposits.
When you need more
When a lender’s underwriting asks for accrual statements, when a buyer is valuing the business, or when inventory or receivables are the story of the year. In those cases a cash-basis packet is still the right starting point: it is the proven cash record that the accrual adjustments are made on top of, and a bookkeeper or CPA will build from it faster than from raw statements.
Saying which basis it is
A financial statement should say its basis on its face. A Rekonix Lite packet prints “cash basis” under the title of each statement and a basis-of-preparation note on the cover, including that the statements were prepared from the bank and card statements provided and were not audited, reviewed or compiled. Readers who know what they are looking at trust a statement that tells them.