Best Practice for Consulting Firm?
We run a small consulting firm and I’m wondering what method of accounting would be best to use in Quickbooks – cash basis or accrual basis? Knowing our cash flow is important, but we definitely need to know what invoices are outstanding.
Second, we incur considerable travel costs (airfare, lodging, meal per diem, etc.), which we bill to each respective client. How should these reimbursed expenses be classified in the books? As revenue? If so, wouldn’t this increase taxable income when it is simply an expense that is then reimbursed?
Hi Taylor, these are great questions! As far as which accounting method to use (cash or accrual) that does not have to be determined until you file your first tax return. In the meantime, you can enter all of your income and expenses into QuickBooks like you normally would. At the end of the tax year, your tax expert will have to declare cash or accrual basis for your business. In QuickBooks, you can run reports on both a cash basis and accrual basis. Your CPA will most likely have you do this and then based on their analysis they will determine if you should use the cash or accrual method of accounting. I wrote an article to help small businesses like you understand the difference between these two methods: SBA: Accrual vs Cash.
For your reimbursable travel costs, I would set up an account called Reimbursable Expenses and code all of your travel to this account as you incur it. When your client pays you, you should also put the payment to this account to essential “clear out” or zero out the original expenses that you coded to it. You will also need to set up a Reimbursable expense item in QuickBooks to help you keep track these expenses. This is something that is difficult for me to provide instructions to in this forum. However, if you contact the Intuit support team and let them know what you are trying to do, they should be able to walk you through the setup.
Crystalynn Shelton, CPA