Onboarding clients to QBOA cash or accrual basis

[mvp2885]

We are setting up a new accounting firm and trying to figure out the "common practice" or best method on onboarding clients that haven't had any bookkeeping done thus far this year. We have a client who is coming to us now, and we are getting them set up with quickbooks. We are trying to input all their info dating back to January till now. 

Other experts in the field say if they are cash basis, then it's easier. For cash basis, simply connect the client's bank account to quickbooks, import all bank statements dating back to January to now, adjust charts of accounts, do some bank rules, add vendors, and reconcile each month individually. Is this the correct way for cash basis? 

For accrual basis with inventory, I haven't really gotten an answer for that. Although my understanding is if they generate less than $25 million, then they can choose to use the cash method, which will be most of our clients. Any help would greatly be appreciated. Than you very much. 

[qbteachmt · Accepted solution]

You seem to be asking a mix of Bookkeeping, Tax Basis, Financial Management, and Best Practices. These need to be examined separately.

Bookkeeping = track everything you know about. Your idea to connect banking is the wrong perspective; that is when the Bank processed something and not your client's perspective. If I pay you in Nov, and you cash it in Jan, we have different tax year reporting perspectives, and cash vs accrual does not even apply here. I spent the funds when I paid you, in Nov. The Banking will show it for when you finally submit it to your bank, if I sent a paper check. And for Credit Card use, the date your checking account pays the credit card balance is not the date there was an Expense. It's the date a Debt Balance was paid; that isn't the date you bought things using that credit card.

Tax Basis = reporting it to State and Fed and other agencies per the right perspective.

Financial Management = track and report and evaluate everything. An accrual or a cash basis entity needs to run reports on both perspectives. Example: my governmental entities that are accrual basis might look like operations are great on accrual basis reporting, but cash basis reporting shows cash flow has significant delays or bottlenecks. You can bill out $5,000 for the last date of the month, but that Accrual Basis sales won't show on Cash Basis, until the customers start to pay.

Best Practices = you will want to enter everything you know, and need to help the client understand their financial reporting, to understand their own operations and activities for them to manage their business and be successful.

This is a rather odd statement: "For accrual basis with inventory, I haven't really gotten an answer for that."

Then I recommend you establish a relationship with a CPA. Get one that will be your own consultant, so that you have a resource for learning what applies. Even as the tax rules change or are refined, this person does something you don't also have the time to do = stays current with the applicability of how to implement the data tracking to meet these requirements. And when you work with clients, you will also work with their CPA, to make sure you are helping the client you have in common meet the expectation of their own CPA.

"Although my understanding is if they generate less than $25 million, then they can choose to use the cash method, which will be most of our clients"

Inventory is an Asset, so that is value still on hand. A Cash Basis entity has to modify their reporting to be able to account for the value not actually "spent" but invested in their inventory.

You will want to spend an hour or two reviewing these basics with your own CPA, as a continuing ed process. Then, consult with them any time you get a client that has something different than what you already learned, so that your understanding continues to grow. That makes you more valuable to all of your clients and to potential clients.

And the QB Community is at this other link: https://quickbooks.intuit.com/community

[DoorstepMobileTax]

If most of your clients are small with income under $25M, you should consider using the cash method, not accrual accounting. Accrual bookkeeping for most small businesses adds an unnecessary layer of work. There are exceptions, such as for inventory reporting and construction companies. 

A cash basis retailer or manufacturer (both with inventory) can report all transactions as cash-basis, with the exception of inventory. Inventory for these businesses must be reported on the accrual basis. Retail businesses can only expense inventory items sold.

Manufacturers can only expense materials used in the manufacturing process for items sold (typically at cost). Parts and materials used to maintain manufacturing machinery must be inventoried separately and expensed as used.

If the primary function of a business is not to manufacture or sell inventory, but sells de minimis inventory items as part of their services, the inventory can be 100% expensed. For example, a mobile car detailer who earns 99% of his income from detail services and 1% selling air fresheners. The detailer can expense all air fresheners in the year that he purchased them, and would not be required to track these items as inventory.

FIFO or LIFO are the most common inventory reporting methods, with LIFO as the default. With income over $25M, all accounting must be completed on the accrual basis; but with income at that level, there are typically other non-tax reasons to track on the accrual basis.

When tracking inventory for retail and manufacturing clients, it is best practice to use a spreadsheet (for smaller operations), or inventory tracking software (i.e., QB add on) for larger or more complex operations.

With a spreadsheet you can simply enter a separate record for inventory date of purchase, purchase volume, # units purchased, unit name and create a tracking ID for each particular inventory item. To get the per unit cost, simply divide the total purchase price (including sales tax and shipping) by the # units purchased. As your client sells or uses inventory on the FIFO basis, you would make the adjustments in a separate "Sales or Maintenance" column. At year-end, for inventory sales, your clients' COGS would be accurate (cost of goods sold).

Most inventory software can be maintained manually, or adapted to use bar-coding to track inventory in and out, but each item in inventory must be assigned a bar code that can be kept in a folder. You don't have to put a physical bar code on each item, but you do have to know which item is being tracked.

With single-member companies, tracking inventory is relatively straight-forward; however, training must be completed for employees so to track items properly (not using the wrong bar codes), or by keeping items in separate bar-coded boxes, bins or areas so that when items are moved in or out, employees have a clear understanding of which item's bar code to scan.

A completely different set of fairly complex inventory rules apply for farming, especially for those with fruit-bearing trees and for farmers who receive farming subsidies.

Sometimes a business may elect accrual basis. There are many business reasons for electing accrual, even when not required tax purposes. Understanding the tax and non-tax advantages in filing accrual is helpful as an advisory too.

However, for most of your clients, especially those who are service based, cash-basis for all transactions should be status-quo.

Cash basis relies on the notion of "Constructive Receipt". You should review IRS guidance on constructive receipt. It is important, especially for adjusting 1099-MISC and 1099-NEC reports vs actual "cash basis" revenue deposits.

For example, when a client pays by check or electronically and the payment is put on hold by your credit card merchant company, or by the bank when a check is deposited, you can push reporting that income forward until the date that your cash-based client has actual control (access) to the funds. Actual control is at the core of the "constructive receipt" doctrine.

Example: On Dec 31, 2020 your client, a cash-basis taxpayer, received a check from a client for $10,000. Check-in-hand is constructive receipt and, therefore, as a cash-based taxpayer, your client must report the $10,000 payment as 2020 income.

However, if your client deposits the check on 12/31 and the bank puts the fund availability "on hold" before midnight, your client will have lost constructive receipt. If the funds are then made available on 1/2/21, your client would have re-gained constructive receipt in 2021.

In this scenario, your client would report that income on his 2021 taxes, effectively deferring taxes on the income until Q1 2021 tax payments are due. But, of course, many business owners elect to pay tax at year-end, thus, for those who do not make estimated payments, tax due on the $10,000 payment would be delayed until March or April 2022 when your clients 2021 tax return is filed.

Because most merchant swipe payments are delayed, a swipe on 12/31/20 would very likely be constructively received in 2021, with the same effect not to be reported on the 2020 tax return.

If paid by check and your client DID NOT deposit it on 12/31/20 with a banking "on hold" status before 12/31/20 midnight, he would technically have had control over the funds (constructive receipt), and would be required to report the $10,000 as 2020 income.

With accrual accounting "constructive receipt" does not apply. Far more complex rules apply to income and expense reporting for accrual-based businesses. The complexity of accrual, and how it can get your clients into trouble when rules are not followed, is reason enough to avoid it whenever possible.

The date on the check, by the way, means nothing. Neither the IRS or banks recognize the date on a check. Dates are for payer and payee records only. Most people don't realize this.

If someone gives you a check and "post-dates" it, doing so does not preclude you from claiming that you were paid when the check was in-hand, and does not preclude you from depositing the check at any time that you please.

In court the payor would lose his argument that he post-dated the check and that you should not have deposited it until the date on the check. Once a signed check is in-hand, you have the right to deposit the check or cash it.

With small business clients for whom you complete year-end bookkeeping (i.e., clients who do not require updated books throughout the year, or who only want mid-year bookkeeping) using a spreadsheet and pivot table for the P&L, Balance Sheet and Stmt. of Cash Flow is much faster and makes working through data so much easier. The spreadsheet drag and drop feature alone is worth using spreadsheets vs QuickBooks.

Based on your questions and the way that you pose them, I'd suggest devouring accounting 101 and 102 books so to thoroughly understand accounting. When someone says, "I know Quickbooks", or identifies as a "bookkeeper", I roll my eyes. You either know accounting or you don't. Without formal accounting training (not bookkeeping coursework), making decisions for categorizing transactions will be guesswork at best.

Bookkeepers without formal accounting training should always be under the direct supervision of a formally educated, experienced accountant. In my 15 years as a tax accountant I have never, not one time, received correct books from a client who self-prepared or used a "bookkeeper"...not even once. And most books that I receive from my clients contain multiple errors, not just a few simple ones.