You might be saying to yourself, "Bianca, what if I want a little cash basis in my accrual?" Lucky for you, there is a third accounting method called the hybrid method. Using this, you can use cash basis accounting to track things like revenue and expenses, but use the accrual method to track inventory. For example, if Lu decided that in addition to mowing lawns, he wanted to sell garden gnomes. He could use cash basis accounting to track his income from mowing lawns but use the accrual method to track his garden gnomes. The key to using this method is consistency. If Lu wants to continue using the cash basis method to track his income and expenses, that's fine but he can't just go off and decide to change it halfway through. Your use of the hybrid method must still clearly reflect your actual income. This can be a little tricky. I'm going to have you listen to another expert explain the ins and outs of hybrid accounting. Make sure you listen up. You may hear in the accounting world out there something called the hybrid accounting method. It's just basically cash or accrual or a combination of those two. That's basically what we're talking about. It could be that for tax purposes when they set up the company, they decided to report to the IRS on a cash basis. That's just beneficial. Usually, when you decide to report to the IRS, that's exactly how you're saying, it's going to be cash basis all the time. However, when you're working in the books month to month, your client may want to see what's the accounts receivable? Will that one be on a cash basis financial? You could run reports in the accrual basis for day-to-day business operations so you can see accounts payable, accounts receivable, and other things like that that are going to help the client make decisions, especially when it comes to cash. If they have a lot of receivables and not enough money in the bank to pay all those bills, they might want to see the books on an accrual basis for that purpose, even though they're filing with the IRS on a cash basis. One reason why a client might have a hybrid accounting method going on is, let's say sales tax. Maybe with their state, they have to file sales tax on an accrual basis, meaning even open invoices that are unpaid that have sales tax on them, they still have to pay them to the taxing authority or the state as if they have the money already. On the skill set for sales tax purposes only, they might be accrual, however, the rest of their financials might be viewed on a cash basis. There might be little areas in the books that just need an accrual versus cash. Again, we're using a hybrid method that way. There's a little segment of the accounting that needs to be accrued. Let's say we are using the hybrid method to report sales tax and pay sales tax on an accrual basis when the rest of the financials are all cash basis. There are extra steps. If you're going to have a hybrid accounting system, you need to make sure that you're taking off a few boxes to make sure you're accounting and paying things appropriately. In the sales tax scenario, we need to actually switch the reporting method in the accounting to accrual just to run the reports for sales tax liability. It'll switch it out. It'll be on accrual basis, so unpaid invoices will be included in that sales tax liability number. It's just a little bit of extra work, but, well, it's easy to do once you know what to do, and you just have to make sure that you have all those little boxes checked off if you're doing any sort of hybrid reporting. If you are working with a client who has a hybrid scenario going on there for their reporting, I would definitely make sure whatever project management application you're using in that firm or within your own firm if you're a solopreneur, you would want to make sure that you have different tasks listed for all of your entries every month. Clear the bank feeds, reconcile blah blah blah. If there's any hybrid accounting going on there, you need to also add that to your checklist every month just to make sure everything has been accounted for and to just cover all your bases. But just be very aware that hybrid accounting can bump up every once a while with a client and you just need to make sure you add it to your standard workflows.
