Earn
2 CE credits
This course was
written for dentists,
dental hygienists,
and assistants.
(Keeping Two Sets of Books Could be a Good Thing)
A Peer-Reviewed Publication
Written by Richard C. Capasso, CPA, PFS, CFP
Abstract
Understanding the method of accounting when
looking at financial statements is important to
determine the profitability of a company. There
are many different methods of accounting,
but the two most common are the Cash Basis
Method and the Accrual Basis Method.
This course will give you a general understanding of both the Cash Basis Method and Accrual
Basis Method of accounting, and when to use
one method over another and why.
Educational Objectives
At the conclusion of this educational
activity participants will be able to:
1.Describe the Cash Basis Method of
Accounting.
2.Describe the Accrual Basis Method of
Accounting.
3.Identify Cash Basis and Accrual Basis
financial statements.
4.Determine when to use these two
different methods of accounting for
practice management.
© Terry Mapstone | Dreamstime.com
Cash and Accrual Basis Accounting
Author Profile
Richard C. Capasso, CPA, PFS, CFP is Vice-President and
shareholder of Clairmont, Paciello and Co, PC, a regional certified
public accounting firm, CPC Financial Planning and Tanglewood
Financial Services which are based in King of Prussia, PA. Mr.
Capasso is a member of numerous boards of directors, is the
recipient of numerous awards and has been recognized for his
contributions to the business, civic and cultural betterment of the
greater Philadelphia region.
Author Disclosure
Richard C. Capasso, CPA, PFS, CFP has no commercial ties with the
sponsors or the providers of the unrestricted educational grant for
this course.
Go Green, Go Online to take your course
Publication date: Oct. 2014
Expiration date: Sept. 2017
Supplement to PennWell Publications
This course is approved for AGD credits only
it is not approved for ADA credits
PennWell designates this activity for 2 continuing educational credits.
Dental Board of California: Provider 4527, course registration number CA# 02-4527-14083
“This course meets the Dental Board of California’s requirements for 2 units of continuing education.”
The PennWell Corporation is designated as an Approved PACE Program Provider by the
Academy of General Dentistry. The formal continuing dental education programs of this
program provider are accepted by the AGD for Fellowship, Mastership and membership
maintenance credit. Approval does not imply acceptance by a state or provincial board of
dentistry or AGD endorsement. The current term of approval extends from (11/1/2011) to
(10/31/2015) Provider ID# 320452.
This educational activity was developed by PennWell’s Dental Group with no commercial support.
This course was written for dentists, dental hygienists and assistants, from novice to skilled.
Educational Methods: This course is a self-instructional journal and web activity.
Provider Disclosure: PennWell does not have a leadership position or a commercial interest in any products or services
discussed or shared in this educational activity nor with the commercial supporter. No manufacturer or third party has had
any input into the development of course content.
Requirements for Successful Completion: To obtain 2 CE credits for this educational activity you must pay the required
fee, review the material, complete the course evaluation and obtain a score of at least 70%.
CE Planner Disclosure: Heather Hodges, CE Coordinator does not have a leadership or commercial interest with products
or services discussed in this educational activity. Heather can be reached at hhodges@pennwell.com
Educational Disclaimer: Completing a single continuing education course does not provide enough information to result
in the participant being an expert in the field related to the course topic. It is a combination of many educational courses
and clinical experience that allows the participant to develop skills and expertise.
Image Authenticity Statement: The images in this educational activity have not been altered.
Scientific Integrity Statement: Information shared in this CE course is developed from clinical research and represents
the most current information available from evidence based dentistry.
Known Benefits and Limitations of the Data: The information presented in this educational activity is derived from the
data and information contained in reference section. The research data is extensive and provides direct benefit to the patient
and improvements in oral health.
Registration: The cost of this CE course is $49.00 for 2 CE credits.
Cancellation/Refund Policy: Any participant who is not 100% satisfied with this course can request a full refund by
contacting PennWell in writing.
Educational Objectives
At the conclusion of this educational activity participants will
be able to:
1. Describe the Cash Basis Method of Accounting.
2. Describe the Accrual Basis Method of Accounting.
3. Identify Cash Basis and Accrual Basis financial statements.
4. Determine when to use these two different methods of
accounting for practice management.
Abstract
Understanding the method of accounting when looking at financial statements is important to determine the profitability
of a company. There are many different methods of accounting, but the two most common are the Cash Basis Method and
the Accrual Basis Method.
This course will give you a general understanding of both
the Cash Basis Method and Accrual Basis Method of accounting, and when to use one method over another and why.
Revenue and Expense Recognition
The major difference between the Cash Basis Method and the
Accrual Basis Method is when revenues and expenses are recognized.
Cash Basis Method
When using the Cash Basis Method, revenue is recognized
when received and expenses are recognized when paid.
Accrual Basis Method
When using the Accrual Basis Method, revenue is recognized
when earned and expenses are recognized when incurred.
Another way at looking at the difference in methods is the
timing difference of revenue and expense recognition.
Example 1:
A dentist performs a procedure on a patient and bills the patient
$250.00 on March 21, 2014. The patient receives a bill on March
27, 2014 and pays it on April 15, 2014 at her next visit.
Under the Cash Basis Method the revenue of $250.00 was
recognized when it was received on April 15, 2014.
Under the Accrual Basis Method the revenue of $250.00
was recognized when the revenue was earned on the date of the
procedure, March 21, 2014.
Example 2:
The fee for the lab work for this patient was $125.00. The lab
billed the dentist on March 24, 2014 and the dental practice
paid the bill on April 5, 2014.
Under the Cash Basis Method the expense of $125.00 was
recorded on April 5, 2014, when it was paid.
Under the Accrual Basis Method the expense of $125.00 was
recorded on March 24, 2014, when the expense was incurred.
In both examples the revenue and expenses were recognized, but the timing of the recognition was different.
The Cash Basis Method focuses on cash flow; the actual
money coming in and out of your business.
The Accrual Basis Method is geared towards matching
revenues and expenses to the time period they are earned and
incurred respectively. The proper matching of revenue and
expenses give the business owner a truer picture of the profitability of his or her business.
It is important to know your cash flow, but it is more important to know if you are profitable in your business.
The Accrual Basis Method of accounting is the generally
accepted method of accounting or G.A.A.P.
When to use the Cash Basis Method
If you are starting up your practice you may elect to use the Cash
Basis Method of accounting for tax purposes. The election for
using Cash Basis Method will have you pay tax on monies you
received and expenses you have paid. This is a simpler method
to use for taxes and again you only pay on what went in and out
of your practice during the year. But be aware if a patient pays
a down payment for a procedure in December but the work is
performed in January; the Cash Basis Method would recognize
the income in December when received, not in January when
earned.
When it is best to use the Accrual Basis Method
From a practice management standpoint the Accrual Basis
Method gives you a true picture of the financial operations. By
matching revenues and expenses during the period they took
place, the reader of the financial statements can have a better
understanding of how the business is doing.
With the Accrual Basis Method you will not only know
your cash position, but you will know other important information such as accounts receivable, prepaid expense and unearned
revenue to name a few.
The basic financial analysis of the balance sheet and income
statement is an important tool for practice management.
Keeping two sets of books
The I.R.S. allows for practices to keep their company books
on the Accrual Basis Method while filing their tax return on
the Cash Basis Method. When you first start filing your tax
returns you must choose one method or the other. Once that
choice is made of which method you are filing your return, you
must continue the same method.
You can change methods, but only with approval of the IRS
by filing a Federal Form 3115, Application of Change in Account Methods.
Although keeping two sets of books may appear to be
double work, most software allows you to have both the Cash
Basis and Accrual Basis Methods in your financial reporting.
These types of options in software give you the best of both
2www.ineedce.com
worlds. You will have the simplicity and potential benefit of
the Cash Basis Method while having a true picture of the practice’s financial position.
Example 3:
Using several transactions you should see the benefit of both
methods as they relate to taxes and the financial statement.
In the first year of operation, Great Smiles produced
$300,000 in total patient invoices for services performed in
2013. $250,000 was deposited in 2013 and $10,000 of that deposit represented down payments on future dental procedures.
In addition, the practice received $200,000 in vendor invoices for 2013 expenses. $190,000 was paid in 2013 of which
$8,000 represented prepayment of 2014 malpractice insurance.
You have elected the Cash Basis Method for tax reporting
and Accrual Basis Method for financial statement purposes.
For this example, equipment purchases did not take place in
2013. The results would be as follows: (Figure 1)
The Accrual Basis Method has $40,000 more income compared to the Cash Basis Method.
The reasons are the proper matching of revenues and expenses.
Accounts Receivable of $60,000 was a result of $300,000
invoiced for 2013 services, but only $240,000 was collected
for those services. The additional $10,000 in cash deposited
was for the down payment of services to be performed in 2014.
The unearned revenue of $10,000 is actually a liability of the
practice until the service is performed in 2014.
Accounts Payable of $18,000 was a result of $200,000
of vendor invoices and expense occurring in 2013, but only
$182,000 was paid. The additional $8,000 in cash payments
was for a 2014 malpractice premium. The $8,000 is a current
asset until properly matched with the 2014 expense.
As was stated earlier, these differences are timing differences and temporarily delay the payment of tax due to the different reporting basis.
Other considerations for taxes are depreciation expenses.
The tax code allows for accelerated depreciation methods such
as MACRS (Modified Accelerated Cost Recovery System),
Bonus Depreciation and Section 179. These methods expense
capital purchases or assets with more than one year of useful
life, generally at a higher rate in the early years. These methods
are not Generally Accepted Accounting Principles (G.A.A.P.).
For the Accrual basics to be in compliance with G.A.A.P.,
you must use straight line method of depreciation. Depreciation is uniform during the useful life of the asset.
When looking at Cash Basis statements and Cash Basis tax
returns, the reader of the financial data could misunderstand
the true profitability of the company. Many readers of financial statements look directly at the net income of a company
and how much cash is in the bank. You should not solely focus
on the net income, especially with a Cash Basis statement. The
true profitability of the practice may not be represented.
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Figure 1.
The Cash Basis Method Tax Return
Great Smiles
Balance Sheet
12/31/13
ASSETS
Cash
$ 60,000
Total Assets
$ 60,000
Owner’s Equity
$ 60,000
Great Smiles
Income Statement
12/31/13
Patient Fees
$ 250,000
Lab fees and Overhead Expenses
$ 190,000
Net Income
$ 60,000
The Accrual Basis Method Financial Statements
Great Smiles
Balance Sheet
12/31/13
ASSETS
Cash
Accounts Receivable
60,000
Prepaid Expenses
8,000
Total Assets
Accounts Payable
$ 60,000
$ 128,000
LIABILITIES
Unearned Revenue
$ 18,000
10,000
Total Liabilities
$ 28,000
Owner’s Equity $ 100,000
Total Liability and Owner’s Equity
$ 128,000
Great Smiles
Income Statement
12/31/13
Patient Fees
$ 300,000
Lab Fees and Overhead Expenses
$ 200,000
Net Income
$ 100,000
3
Having accounts receivable, accounts payable and other
Accrual Basis accounts will show a truer picture of profitability.
When looking at whether to merge, buy or sell a practice, it
is good to see three years of tax returns. It is equally important
to see the books and records of the practice on the Accrual Basis
for the same three-year period. By looking at both, you can get
a true sense of profitability, cash flow, financial obligations and
tax obligations of the practice.
Do not be fooled by what your gross income is or how much
cash you have in your practice bank account. You need to understand how profitable your practice is and how much of the
cash in the bank is truly the practice’s and not an unpaid debt.
There are too many times a vendor is not paid but the practice
has the cash in the bank. This is why the Accrual Basis should
always be considered a preferred method to determine profitability.
Keeping two sets of books is a good thing; you have the
potential tax benefits of using the Cash Basis and the benefit of
knowing the true profitability of the practice.
There are more fine points of the Cash Basis Method of reporting and the Accrual Basis Method of reporting. The objec-
tive of a basic understanding of both methods, how to identify
them and when to use them have been presented.
The Cash Basis Method and Accrual Basis Method of accounting are both valuation methods for a practice. You should
consult your accountant for more detail on how these methods
can work for you in both taxes and practice management.
Author Profile
Richard C. Capasso, CPA, PFS, CFP is Vice-President
and shareholder of Clairmont, Paciello and Co, PC, a regional
certified public accounting firm, CPC Financial Planning and
Tanglewood Financial Services which are based in King of
Prussia, PA. Mr. Capasso is a member of numerous boards of
directors, is the recipient of numerous awards and has been recognized for his contributions to the business, civic and cultural
betterment of the greater Philadelphia region.
Author Disclosure
Richard C. Capasso, CPA, PFS, CFP has no commercial ties
with the sponsors or the providers of the unrestricted educational grant for this course.
Notes
4www.ineedce.com
Online Completion
Use this page to review the questions and answers. Return to www.ineedce.com and sign in. If you have not previously purchased the program select it from the “Online Courses” listing and complete the online
purchase. Once purchased the exam will be added to your Archives page where a Take Exam link will be provided. Click on the “Take Exam” link, complete all the program questions and submit your answers. An
immediate grade report will be provided and upon receiving a passing grade your “Verification Form” will be provided immediately for viewing and/or printing. Verification Forms can be viewed and/or printed anytime
in the future by returning to the site, sign in and return to your Archives Page.
Questions
1.Prepaid Expenses would be found on
a(n):
a. Accrual Basis Method Income Statement
b. Cash Basis Method Income Statement
c. Accrual Basis Method Balance Sheet
d. Cash Basis Method Balance Sheet
2.Accrual Basis Method uses the:
a. Matching Principle
b. Consistency Principle
c. Timing Principle
d. Balanced Principle
a. Accrual Basis Method
b. Depreciation Basis Method
c. Cash Basis Method
d. Financial Statement Method
9.A difference in the Cash Basis
Method and Accrual Basis Method
is:
a. Revenue and expense allocation
b. Revenue and expense proration
c. Revenue and expense apportion
d. Revenue and expense recognition
3.The difference between Cash Basis
Method and Accrual Basis Method
is an example of:
10. A small business tax return could
be prepared using:
4.The Accrual Basis Method is
prepared according to:
11. Which of the following do most
small businesses use when preparing
year end taxes?
a. Statement Difference
b. Timing Difference
c. IRS Difference
d. Efficiency Difference
a. IRS Regulations
b. Financial Accounting Standards
c. Generally Accepted Auditing Standards
d. Generally Accepted Accounting Principles
5.Expenses recognized when paid is an
example of:
a. Accrual Basis Method
b. Depreciation Basis Method
c. Cash Basis Method
d. Financial Basis Method
6.The IRS allows a company to
maintain their records on:
a. Accrual Basis Method
b. Cash Basis Method
c. Both a and b
d. None of the above
7.The Asset Category of Cash can be
found on:
a. Cash Basis Method of Accounting
b. Accrual Basis Method of Accounting
c. Both a and b
d. None of the above
8.Expenses recognized when incurred
is an example of:
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a. Cash Basis Method
b. Accrual Basis Method
c. Both a and b
d. None of the above
a. Deferred Basis Method
b. Accrual Basis Method
c. Financial Basis Method
d. Cash Basis Method
12. Revenue when received is an
example of the:
a. Accrual Basis Method
b. Depreciation Basis Method
c. Cash Basis Method
d. Financial Basis Method
13. A practice can petition the IRS
to change an accounting period by
filing form:
a.1040
b.1120S
c.1065
d.3115
14. Accelerated depreciation would be
found on a:
a. Cash Basis Tax Return
b. G.A.A.P. Financial Statement
c. Statement of Cash Flow
d. Financial Footnotes
15. A payment of $5,000 is made on
12/28/12 for 2013 malpractice
expenses. On the Accrual Basis,
how much of the expense would be
recognized in 2012?
a.$5,000
b.$2,500
c.$0
d.$1,000
16. Accounts Receivable on an Accrual
Basis Balance Sheet represents:
a. Total Sales
b. Net Sales
c. Outstanding patient invoices not yet paid
d. Total invoices
17. Revenue recognition when earned
is an example of:
a. Cash Basis Method
b. Depreciation Method
c. Financial Statement Method
d. Accrual Basis Method
18. Accounts payable on an Accrual
Basis Balance Sheet represents:
a. Total Expenses
b. Total Cost
c. Total Invoices
d. Outstanding vendor invoices not yet paid
19. Lab Fees Expenses can be found
on:
a. Accrual Basis Income Statement
b. Cash Basis Income Statement
c. Both a and b
d. None of the above
20. The truest view of a practice’s
profitability would be found in:
a. Accrual Basis Income Statement
b. Cash Basis Income Statement
c. Both a and b
d. None of the above
5
ANSWER SHEET
Cash and Accrual Basis Accounting (Keeping Two Sets of Books Could be a Good Thing)
Name:
Title:
Specialty:
Address:E-mail:
City:
State:ZIP:Country:
Telephone: Home (
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) AGD Member ID:
Requirements for successful completion of the course and to obtain dental continuing education credits: 1) Read the entire course. 2) Complete all information
above. 3) Complete answer sheets in either pen or pencil. 4) Mark only one answer for each question. 5) A score of 70% on this test will earn you 2 CE credits. 6)
Complete the Course Evaluation below. 7) Make check payable to PennWell Corp. For Questions Call 216.398.7822
If not taking online, mail completed answer sheet to
Academy of Dental Therapeutics and Stomatology,
Educational Objectives
A Division of PennWell Corp.
1. Describe the Cash Basis Method of Accounting.
P.O. Box 116, Chesterland, OH 44026
or fax to: (440) 845-3447
2. Describe the Accrual Basis Method of Accounting.
3. Identify Cash Basis and Accrual Basis financial statements.
For immediate results,
go to www.ineedce.com to take tests online.
Answer sheets can be faxed with credit card payment to
(440) 845-3447, (216) 398-7922, or (216) 255-6619.
4. Determine when to use these two different methods of accounting for practice management.
Course Evaluation
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CASHACC1014DE
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