Billy is fundamentally an Accrual Accounting system but defaults all new organizations to a cash-basis view of your primary financial statements.
What is Cash-basis and Accrual-basis accounting?
The difference between Accrual and Cash accounting is a matter of timing. If you recognize your revenues when you send an invoice (i.e. with an Accounts Receivable) then that’s Accrual. If you recognize your revenues when you get paid for an invoice, that's Cash Accounting.
Cash Accounting is most common for businesses with no inventory such as services businesses. The method of accounting used has large implications for when you report your taxes.
For example, if you send an invoice for $10,000 at the end of the year that is still unpaid, your taxes will look very different the following year depending on your accounting method. In Cash Accounting, that invoice doesn’t show up as income and so you won’t have to pay taxes on it. But, with Accrual Accounting, you will pay taxes on that income, even though you haven’t been paid yet.
How to switch to a full Accrual-basis on your financial statements
In order to revert your Profit & Loss and Balance Sheets to a full accrual-basis, head on over to your Settings > Organization and select Accrual > Save.
Why Billy defaults to Cash-basis reporting
Most small businesses and certainly most service businesses report their taxes in a Cash-basis. The IRS makes it very difficult (if not nearly impossible) to legally alternate between these two systems. So you don’t want to be casually switching between the two when reporting your taxes.
In order to ensure that your tax reporting is consistent from year to year, Billy allows you to switch between the two accounting methods so Billy matches how you report your taxes.
Many small business owners are not trained accountants and cash-basis is the simplest and easiest to understand method for thinking about your income, expenses, assets, and liabilities. When you get paid, you have income. When you pay for something, you have an expense. Simple. And making your money simple is our mission.
Why Billy fundamentally runs as an Accrual system
So if Cash-basis is so great, why run Accrual at all?
Cash-basis doesn’t help when you’re making management decisions since you have only a day-to-day view of finances. With Accrual, you’ll know who you’ve sent an invoice to that is yet to pay it. Or if you have a bill to pay this month and want to make sure your net income reflects the pending operational cost.
Simply put, Accrual gives you a better view of your business’s actual performance because it shows when income and expenses occurred. If you want to see if a particular month was profitable, accrual will tell you. Whereas cash will just show you if you have money in the bank or not. And as you know, money in the bank doesn’t necessarily mean you are profitable.
Based on that, Billy’s dashboard still shows you these Accrual details for better business management, while still offering Cash-basis financial reports for your taxes.