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 MINDBODY site. Here is an example:
Bob Ross buys an “I Love MINDBODY” assignable gift card from your business, on October 1, for $100. Bob’s wife comes back on October 10, and buys a $100 massage using the gift card. When did your business make money?
- Accrual-based accounting
- Cash-based accounting
- Problems with cash-based accounting
- Deposits section on the Sales Report
Accrual-based accounting tracks a sale the day a client purchases something from your business. Purchases made on account or with a gift card will all show on the day the client redeems the service, not when someone buys the gift card 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.
- 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 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.
- 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
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 (Bob’s wife 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 Bob’s wife as doing any business on October 10th.
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).
The Deposits section on the Sales report displays the original price and remaining balance of payments to account and assignable gift cards. Note that prepaid gift card purchases appear above in the non-deposits section. With cash-based accounting, if a client purchases a gift card on October 1st, then that gift card will display in the Deposits section at the bottom of the Sales report for October 1st. This is to make it clear that you have collected the money for the gift card, but it hasn’t been used by your client to actually purchase any products or services yet.
When your client redeems that gift card on October 10th by using it to purchase a product or service, the cash-based Sales report will then move money from the Deposits section for October 1st to the Sales section for October 1st. Remember that with cash-based accounting, you made the sale when the client gave you the money. What is important to take away from this? Using cash-based accounting, sales reports for a single day can and will change over time. This is why accountants don’t recommend using cash-based accounting for businesses that offer assignable gift cards or account credit.
The previous example is helpful to fully explain this:
- Recall that on October 1st Bob bought that gift card with $100. If you ran the Sales report later that day using cash-based accounting, then it would show a $100 sale for October 1st in the Deposits section.
- Then on October 10th Bob’s wife came in and redeemed the gift card for a massage. If you run the Sales report for that day using cash-based accounting, then it will now display Bob as having purchased a $100 service (massage) on October 1st for $100.
- Essentially, the software is waited to see what Bob would use the gift card for before it reported on what was actually purchased.
One last detail to the cash-based Sales report
The purpose of the Deposits section is to enable the cash-based Sales report to show a consistent total over time. Money is allowed to move from the Deposits section of the report to the Sales section, but the sum of the Sales Total and Deposits Total will always be the same. This way, if you print the Sales Report and generate it again later, you always know how much you made each day.