Cash vs Accrual Based Accounting for Government Contractors
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Cash basis accounting is easily understood and usually adopted by most start-up companies. Cash basis reports only consider the flow of cash in or out of the business without regard for the often complicated rules of accrual basis accounting. Accrual basis accounting requires matching of revenue and expenses and recognition of revenue when earned and expenses when incurred - all regardless of when the cash was received or spent. Accrual basis accounting provides a more accurate picture of the business and is a requirement for government contractors to achieve an adequate accounting system. Learning Objectives 1. Describe cash versus accrual based accounting 2. Define the matching principle 3. Explain the concepts of revenue recognition 4. Describe the impact of accrual accounting on filing taxes
Cash vs Accrual Based Accounting for Government Contractors
- 1. Copyright 息 2014-2022 Left Brain Professionals Inc. Accrual vs Cash Basis Accounting for Government Contractors
- 2. Copyright 息 2014-2022 Left Brain Professionals Inc. We Know Government Contract Accounting
- 3. Who We Are Left Brain Professionals is a boutique accounting firm that serves government contractors. We specialize in accounting systems and strategic services.
- 4. Copyright 息 2014-2022 Left Brain Professionals Inc. Our Practice Areas ACCOUNTING SYSTEMS Accounting System Design & Implementation Monthly Support Packages STRATEGIC SERVICES DCAA Audit Support CFO & Controller Services
- 5. Our Team Robert E. Jones Principal GovCon Accounting Advisor CPA, CPCM, NCMA Fellow Steven Bressler GovCon Accounting Associate Steve@LeftBrainPro.com Robert@LeftBrainPro.com Copyright 息 2014-2022 Left Brain Professionals Inc. Suzanne@LeftBrainPro.com Suzanne Camden Sr. GovCon Accounting Advisor CPCM, NCMA Fellow
- 6. Learning Objectives Copyright 息 2014-2022 Left Brain Professionals Inc. Describe cash versus accrual based accounting Define the matching principle Explain the concepts of revenue recognition Describe the impact of accrual accounting on filing taxes
- 7. Copyright 息 2014-2022 Left Brain Professionals Inc. CPE Info Instructional Delivery Method: Group Internet Based Program Level: Intermediate Recommended CPE Credits: 1.0 Field of Study: Accounting Left Brain Professionals Inc is registered with the Ohio Board of Accountancy (license CPE.445) as a sponsor of continuing professional education. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the Ohio Board of Accountancy through its website: https://elicense.ohio.gov/oh_filecomplaint.
- 8. Poll Copyright 息 2014-2022 Left Brain Professionals Inc. Which is easier? A. Cash Accounting B. Accrual Accounting
- 9. Copyright 息 2014-2022 Left Brain Professionals Inc. Cash vs Accrual Cash is easy Accrual is hard(er)
- 10. Copyright 息 2014-2022 Left Brain Professionals Inc. Cash vs Accrual Cash Basis Recognize revenue when cash received Recognize expense when cash paid Accrual Basis More rules to follow: GAAP
- 11. Copyright 息 2014-2022 Left Brain Professionals Inc. What is GAAP? GAAP is the set of accounting rules set forth by the FASB that U.S. companies must follow when putting together financial statements.
- 12. Copyright 息 2014-2022 Left Brain Professionals Inc. What is GAAP? GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information. The ultimate goal of GAAP is to ensure a company's financial statements are complete, consistent, and comparable.
- 13. Copyright 息 2014-2022 Left Brain Professionals Inc. What is GAAP? Recognize revenue when earned (more on later) Recognize expenses when incurred Disclosing liabilities PTO liability and expense Lease liability
- 14. Copyright 息 2014-2022 Left Brain Professionals Inc. Principles of GAAP 1. Economic Entity Principle 2. Monetary Unit Principle 3. Time Period Principle 4. Cost Principle 5. Full Disclosure Principle 6. Going Concern Principle 7. Matching Principle 8. Revenue Recognition Principle 9. Materiality Principle 10.Conservatism Principle
- 15. Poll Copyright 息 2014-2022 Left Brain Professionals Inc. Which GAAP principle addresses the relative value of an item or account to the larger set of financial statements? A. Economic Entity Principle B. Cost Principle C. Materiality Principle D. Conservatism Principle
- 16. Copyright 息 2014-2022 Left Brain Professionals Inc. Hybrid In many small business we often see an unofficial hybrid approach Balance Sheet shows A/R, A/P, and Credit Card Income Statement displays cash receipts and expenditures Business not following all principles of GAAP
- 17. Copyright 息 2014-2022 Left Brain Professionals Inc. Matching Principle Revenue and expenses need to Match the period Align with each other
- 18. Copyright 息 2014-2022 Left Brain Professionals Inc. Matching Principle
- 19. Copyright 息 2014-2022 Left Brain Professionals Inc. Matching Principle
- 20. Poll Copyright 息 2014-2022 Left Brain Professionals Inc. How often do you have swings between significant profits and significant losses? A. Yes. B. No.
- 21. Copyright 息 2014-2022 Left Brain Professionals Inc. Revenue Recognition Recognize revenue when it's earned When is it Earned? ASC 606 1. Identify the contract with a customer 2. Identify performance obligations 3. Determine the transaction price 4. Allocate price to the obligations 5. Recognize revenue when obligation is satisfied
- 22. Copyright 息 2014-2022 Left Brain Professionals Inc. Complication for GovCon Termination for Convenience Government agrees to reimburse reasonable, allocable, and allowable expenses Little or no risk to contractor Expenses should be recognized as incremental revenue
- 23. Copyright 息 2014-2022 Left Brain Professionals Inc. Complication for GovCon Practical Application Not an issue for services delivered and invoiced within the month Not an issue for items purchased or manufactured and delivered within the month Milestone or other long-term contracts with sporadic billing or billing upon final delivery Reversing accrual entry each month
- 24. Copyright 息 2014-2022 Left Brain Professionals Inc. Accrual & Taxes Passthrough entities may pay taxes on either cash or accrual basis regardless of financial statements
- 25. Copyright 息 2014-2022 Left Brain Professionals Inc. Accrual & Taxes Cash basis is easiest, but requires some work to convert accrual to cash Accrual basis matches the books but can result in paying taxes on revenue earned but cash not received Only an issue when you have significant swings in revenue or profitability
- 26. Copyright 息 2014-2022 Left Brain Professionals Inc. Accrual & Taxes Taxes may reflect other timing differences or non-deductible expenses Books must reflect book (straight line) depreciation, not tax (accelerated) depreciation Ties back to the "hybrid" books we often see Distorts reality when a large tax depreciation entered in December
- 27. Poll Copyright 息 2014-2022 Left Brain Professionals Inc. How much help do you need with accrual-based accounting or GAAP compliance? A. Just a little. B. A lot. C. None, Ive got this.
- 28. Copyright 息 2014-2022 Left Brain Professionals Inc.
- 29. Connect with us Download the presentation Left Brain Professionals Inc. @LeftBrainPro Email us Support@LeftBrainPro.com @LeftBrainPro Left Brain Pro LeftBrainPro www.LeftBrainPro.com/presentations
- 30. Copyright 息 2014-2022 Left Brain Professionals Inc. Watch Our Videos
- 31. Copyright 息 2014-2022 Left Brain Professionals Inc. For information on our upcoming webinars, visit us at LeftBrainPro.com/events for more details.