Accrual versus Cash Accounting Example

Accrual accounting means that all payables are booked when the debt financial transaction (bill segment or adjustment) is created.

If the payable is subject to payables cash accounting, the liability is not booked when the bill segment or adjustment is created, rather, the amount of the liability is placed in a "holding" GL account. When the taxpayer pays, the moneys are transferred from the "holding" GL account to the true tax payable account.

The following is an example of the financial events that transpire when a simple sales tax assessment is posted and a payment is received using accrual accounting.

In the above example, you'll notice that the payable is booked when the adjustment is created. Let's contrast this with what takes place if the payable is subject to payables cash accounting.

Notice that when the adjustment is created, the payable for the county is not booked, rather, the amount is placed in a "holding" GL account. When the taxpayer pays, the moneys are transferred from the "holding" GL account to the true County A payable account.

If the above seems simple, consider the following complications that must be considered:

• What happens if a partial payment is received?

• What happens if there are multiple amounts subject to cash accounting rules?

• What happens if the payment is cancelled?

• What if the payment isn't received and we have to write-off debt?

• What happens if the taxpayer overpays?

• What happens if the obligation is subject to penalty and interest and dynamic credit allocation?

The above points, and more, are discussed below.