Basis for Accounting – Cash or Accrual?

Cash sounds better, we like cash. Everyone likes cash but as a marijuana accountant, I invite you to consider the differences when it comes to the basis for reporting your financial operations. Nerds like me spent many years studying the difference between cash and accrual based financial statements. We spent a lot more time on accrual because it is more complicated than cash. And yes, here it comes, I am going to recommend that you use accrual, not because it’s more complicated but because it paints a truer picture of your financial results. Remember that financial story I mentioned in previous blogs? Accrual based accounting tells a more accurate story. First let’s talk about what we mean by basis for accounting. Your basis for accounting is the premise upon which you report your financial activity. Simply put, it the set of rules that govern the preparation of your financial statements. There are other bases of accounting besides these two, such as modified cash, modified accrual and income tax basis, but cash and accrual are the basics. Cash basis of accounting is reporting sales when they are collected, and reporting expenses when they are paid. For most of you in the cannabis business, your income statement under the cash basis would report all of your sales (because you collect all your sales when the sale is made) but report only the expenses you actually paid in the given month. Accrual basis of accounting is often called the matching principle, because it matches and reports revenues AND the expenses attributable to those revenues on the same financial statement. It’s easier to...