Bookkeeping can turn into a nightmare very quickly when you’re running a rental business. Unlike retail, rentals span a series of processes that involve booking, renting out, and returning items. For this reason, gaining insight into company cash flow becomes complicated, making it hard to measure the revenue at hand and business profitability.
EZRentOut enables companies to set up the accounting basis best suited to their company structure to position them for consistent growth. We now support both cash and accrual basis of accounting.
The difference between the two is of when the revenue generated from rentals or sale items is recorded to the system. With cash-based accounting, revenue is registered whenever cash is received. With accrual, cash influx is recorded when revenue is earned. Let’s explore these further.
1. Cash-based Accounting in EZRentOut
Cash-based accounting records cash when it is received or paid. It does not recognize accounts receivable or payable. In this manner, revenue generated in a given time period is the actual revenue on hand. So, if an order has been rented out but the payment hasn’t been made, the company financials are only updated once the payment comes through.
Moreover, the revenue in your accounts at the end of the year is subjected to the income tax for that year. If orders were rented out during the end of 2018 but the payment wasn’t made until 2019, all revenue generated from this order will be subjected to the tax year of 2019.
In EZRentOut, you can charge payment on Booked, Rented Out or Returned Orders whenever the transaction takes place. Consequently, rent and taxes collected are updated in the system, further updating the corresponding reports. The total payment received on an Order is divided over its items based on the ratio of their individual rents.
2. Accrual-based Accounting in EZRentOut
In the accrual basis, accounts receivable and payable depict cash owned and owed by a company respectively. This means that company financials are updated as expenditure is incurred or revenue is earned, irrespective of when cash is actually received or paid.
Consequently, company financials do not represent the actual amount residing in company accounts but the quoted amount is still taxable. Thus, in accrual-accounting, you pay taxes on revenue that you might not yet have. In this way, revenue earned in December 2018 will be applicable to the 2018 tax year, even if it is actually received in 2019.
So, which one should you pick? Cash or accrual accounting? No one size fits all but accrual accounting is more widely used as it provides credible insight into company profitability for better long-term planning.
With accrual-based accounting set up in EZRentOut, revenue and corresponding taxes will be recorded depending on revenue earned, and not on when it’s actually received. This impacts revenue and taxes wherever it appears in the system. You can also define revenue to be earned depending on the Order state.
3. Setting up your preferred accounting system in EZRentOut
In order to set up your accounting preference in EZRentOut, head to Settings → Company Settings → Revenue Recognition. Here, choose Cash or Accrual.
If you opt for Accrual, further specify when revenue should be recorded to EZRentOut.
You can choose between the following dates:
- Order Completion Date
- Rented Out Date
- Returned On Date
- Booked On Date
- Booked From Date
In this way, if you select ‘Order Completion Date’, rent from an Order will only be recorded once the Order goes to the Completed state. For instance, if a Customer returns all of the items in an Order and makes the complete payment on the 1st of June, the Order will be marked completed and the revenue generated from it will show up in your reports.
Once you’ve made your selection, save it by hitting the Enter Key or scroll down to the ‘Update’ button.
4. Reports influenced by your accounting settings
Some reports in EZRentOut are influenced by Revenue Recognition. Take note of the following:
- If an Order is directly rented out without being booked first and the Accrual Setting is defined to record revenue by Booked From or Booked On Dates, Orders will be filtered by their Rent Out Dates.
- Inventory Items are not rented out, so the date that they’re sold on will be considered their Rent Out Date.
- We’ve edited out some columns in the following reports that aren’t impacted by Revenue Recognition for the sake of brevity. These include columns Asset Identification Number, Model Number, Item Description, and Vendor Columns.
4.1. Revenue Growth Graph
The Revenue Growth Graph is a good starting point to see just how differently revenue is recorded based on your Revenue Recognition Setting.
Note: We’ve updated our Revenue Growth Graph. It now displays revenue recorded instead of the paid Order Total.
4.2. Rent Summary Report
Data columns affected by Revenue Recognition are:
- Total rent collected (until now)
- Rent collected between selected dates
You will also be able to filter according to the ‘Order completed Between’ Dates. Here’s a look at the report:
The filter also changes depending on the date specified for your Accrual Setting. If you choose the Rent Out Date, the filter will be ‘Order rented out Between’. If you choose the Return Date, the filter will be ‘Order returned Between’. Let’s look at the report.
4.3. Sales Summary Report
Column affected by Revenue Recognition: Total Sale Price.
Orders in the Sales Summary Report represent Inventory that is sold off. These Orders only appear in the report once completed.
These records show according to when Inventory is sold off and do not depend on the date specified in Accrual Revenue Recognition. However, if an Order has both consumables and rentals, then the date that you specify in your Accrual Revenue Recognition Settings will play in.
4.4. Tax Collected Report
Data columns affected by Revenue Recognition Settings:
- Total Tax
- All created taxes
For this report, we will be looking at Orders rented out or booked in the month of May in our account.
There will also be an additional Total Paid Tax to represent the tax amount that has been collected.
Note: If an Order has multiple payments charged to it, each payment will show up as a different entry in the Tax Collected Report.
4.5. Tax Collected Growth Report
4.6. Custom Report
Column affected: Rent Collected
Here is what a Custom Items Report looks like depending on your accounting preference.
4.7. All Asset Stock Report
Column affected: Total Rent Collected (up till now)
That’s it! Bookkeeping can be complicated but EZRentOut takes the hard work right out of your hands. Whether you’re choosing cash or accrual, just be sure to refer to the right report to craft rock-solid strategies for your business!
Read more: Item Reports in EZRentOut