Cash and accrual are two commonly accepted methods for keeping your company's books. It's important to know the difference between the two as they track assignable gift cards and sales based on account very differently in your PABAUsite. Additionally, accrual and cash combined accounting can generate important sales information that may not show in the report otherwise.
Here is an example:
A client buys an "I Love PABAU" assignable gift card from your business, on October 1, for £100. The Client's partner comes back on October 10, and buys a £100 massage using the gift card. When did your business make money?
Accrual-based accounting
Accrual-based accounting tracks a sale the day a client purchases something from your business. Purchases made on account, with a gift card, through a partner like Stripe, or any other delayed payment/redemption will all show on the day the client redeems the service, not when someone buys the pass used to pay for it. In fact, because gift cards are not associated with any kind of service, they will not show up on the Sales report when it's run in accrual basis.
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Example: Your business made £100 on October 10th.
Accounting tip: If you sell gift cards or offer account credit, then most accountants will recommend that you use accrual-based accounting. Accrual is an accounting system designed for account balances that are added to and then paid off.
Cash-based accounting
Cash-based accounting tracks a sale the day your business was paid for it. Meaning, if a client buys something on account or with a gift card, then there is no sale to track because no money was received. A cash-based report will show the money earned when a client purchases the gift card, but will not show the products or services that are purchased with the gift card.
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Example: Your business made £100 on October 1st.
Accounting tip: Cash-based accounting is not as robust as accrual-based, and not designed to handle gift cards and account credit. If you offer these two items, then most accountants will recommend that you use accrual-based accounting
Problems with cash-based accounting
The primary issue with using cash-based accounting is that the method will not indicate when revenue was actually earned, just when it was received (i.e., when the purchase of a service or an item took place). In the example above (Client's partner redeems the gift card on October 10th), using cash basis the sales record for the massage is marked for October 1st and the payment method is cash. Because cash-based accounting records the sale when the money is received (October 1st), there is nothing on the Sales report that marks Client's partner as doing any business on October 10th.
Gift Cards
You sell a £500 gift card; with cash-based accounting you made £500, but you've really made nothing. Your client has just given you an interest-free loan.
Payments on Account (taking money before services are rendered)
You accept £500 from a client and give £600 in studio credit. In cash-based accounting, you made £500, but actually owe £600 in services (or £500 if a refund is given).
Accrual and cash combined accounting
Accrual and cash combined accounting is less utilized than the options above but will display all sales, including purchases of account payments or prepaid gift cards that were made using a non-cash equivalent (e.g., Trade or Other) payment method. Tips will also display if "Tips included in Cash Drawer & Payroll" is enabled on your site. It will show all the sales that happened within a certain time frame, regardless if it is for a Prepaid Gift Card, or the items that have been purchase with Prepaid Gift Cards. this will show an accurate total, but does not represent the actual revenue that the business has taken in.
For example, if a prepaid gift card was purchased with £50 cash, and then that same gift card was used to pay for a Massage on the same date, the total with accrual and cash combined is £100, when really only £50 cash was collected. Running the sales report with Accrual will only show the sale of the Massage while running the report with the account method Cash, will only show the sale of the Prepaid Gift Card.