Cash vs. Accrual Church Accounting Methods: 15-Minute Crash Course
When I took accounting in college, one of my fellow students asked the instructor why we had to complete our homework assignments by hand. After all, it is the 21st century; everyone just uses accounting software now!
The wise accounting instructor rebutted by explaining that we need to understand how to do accounting with a pencil and paper before we understand how to do it using software programs.
But, couldn’t we just learn from using software?
Probably, but now that I work at a church accounting software company, I actually agree with my instructor completely.
Accounting is accounting. If you understand the basic principles, you will be able to use that knowledge with any accounting software. If you don’t know how to record a journal entry or balance a checkbook on paper, it’s much more difficult figuring out how to apply those same concepts within an accounting program — no matter how user-friendly it is.
A few accounting questions I often get asked by customers are:
What do AR and AP mean?
They are abbreviations for Accounts Receivable and Accounts Payable.
Should I use the Accounts Receivable and Accounts Payable modules in my church accounting program?
That depends on which accounting method you are using; cash method, accrual method, or a combination of both.
An accounting method is a set of rules used to determine when and how income and expenses are reported. (irs.gov)
What’s the difference between cash accounting and the accrual basis of accounting?
The IRS website has this to say about cash accounting:
Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. (irs.gov)
And this about accrual basis:
Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year. (irs.gov)
Please consult your CPA if you are unsure which method you should be using.
A few weeks ago, I stumbled across videos on khanacademy.org. They do a great job explaining the concepts outlined above in a way that is easy to understand for someone without much of an accounting background.
I listed the titles below so you have an idea of what to expect. But I only linked to the first one since the videos are set up in a queue (i.e. once you finish the first the next one will start to load.)
FREE 15 minute crash course on accounting methods:
- Cash Accounting
- Accrual Basis of Accounting
- Comparing Accrual and Cash Accounting
Got a few extra minutes?
Keep watching! The next three videos in the queue cover financial statements and accounts payable.
Looking for even more information?
Download the FREE e-book from Icon Systems: Fund Accounting for Church Leadership.