On a fundamental level, there are two methods of accounting: cash and accrual. These two methods differ in the recognition of revenue on a school’s income statement. Blackbaud Tuition ManagementTM supports both methodologies, so let's take a closer look to better understand which accounting practice is best for your school.
The Cash Method of Accounting
Under the cash method of accounting, transactions are only recorded when cash changes hands. This means that revenues are recognized when cash is received, and expenses are recognized when they are paid. While this method is straightforward and easy to understand, it fails to adhere to two tenets established in Generally Accepted Accounting Principles (GAAP): the revenue recognition and the matching principle.
The revenue recognition principle states that revenues should be recognized in the period in which they are earned, which isn’t always when cash is received. The matching principal calls for expense recognition to occur in the period that the related revenues were earned—this also doesn’t always correspond to the outflow of cash.
If a school is using the cash method of accounting, it does a good job of tracking the school cash flow, but it does a poor job of matching its revenues earned with money laid out for expenses.
The Accrual Method of Accounting
In the accrual method of accounting, revenues and expenses are recognized in the period when they are earned and incurred, regardless of when the money was received or paid. Under this method, the recognition of revenue and collection of cash are independent of each other.
GAAP requires schools to use the accrual method because it provides a better picture of profits and financial position during an accounting period than the cash method. The reason for this is that the income statement prepared under the accrual method will report all of the revenues actually earned during the period and all of the expenses incurred in order to earn the revenues (matching principles).
Blackbaud Tuition Management
Blackbaud Tuition Management supports both accounting practices. Schools can run reports that allow monthly journal entries to be booked on cash or accrual methods of accounting. Plus, when schools use the accrual method, we have an available integration to send batch journal entries from Blackbaud Tuition Management into Blackbaud Financial Edge®.
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