One of the oddities of optometry practice is how practices count, record and allocate their income and expenses throughout their tax year. Traditional accounting science revels in teaching first year students accrual accounting and yet most optometry practices use cash accounting.
The difference between the two is significant. Cash accounting recognizes income and expenses only when you receive it or pay it. Accrual accounting recognizes income and expenses as soon as it has become a promise or have an obligation. It is recorded on your books even though it hasn’t arrived at your bank. Likewise, you can record expenses even though you haven’t been paid out.
For optometrists, it is appealing to use cash accounting mainly for tax purposes. Since income and expenses are only recorded when actually received or expensed, the tax consequences may be affected by late year decisions. For instance, a doctor may be able to report less income, simply by accepting payment from a patient until the next tax year. Likewise, doctor may pre-pay an expense even though none had been presented by a vendor. In accrual accounting this is not possible.
As one can imagine, cash accounting can disguise the current assets and liabilities and cash flow of a business. Cash accounting is accepted and there it is an absolutely bona fide manner to operate a business. However, it may disguise the “true” picture of the financial status of a practice, because it makes comparing businesses difficult in buying or selling a practice.
Accrual accounting, however, is the hallmark of most larger businesses and more accurately reflects the liabilities of a organization than cash accounting. Many more business benchmarks are available for businesses using accrual than for cash accounting.
In summary, the tax planning frequently dictates more of the kind of accounting than anything else. Being aware of the kind of accounting being used makes the outsider much more inquisitive of the business owner as everything may not be as it seems.