[dboreham]

Quick note that cash vs accrual basis accounting is orthogonal to whether the balances are correct or not. IANAA but afaik GAAP does not preclude cash basis accounting, provided the conditions where cash accounting is permitted pertain.

[cj]

you’re right, although cash basis would only fly under GAAP if you earn revenue at the time of cash receipt. In other words, anyone collecting money for services not immediately rendered (any subscription service) should be accrual

[SoftTalker]

I don't think cash basis precludes having a liability on the books for un-delivered services. It just means you recognize the revenue when the payment is received. Lots of small companies use cash basis because it's simpler and easier to understand. IANAA.

[jwsteigerwalt]

That’s right. Financial accounting and taxation are not the same thing. Even if you are taxed on a cash basis, it’s prudent to manage your business with appropriate revenue deferrals.

[cj]

I thought by definition you never have any revenue liability on the books (no unearned revenue) with cash basis because you’re recognizing the revenue on the date the cash is received. Nothing is deferred therefore no liability.

[rswail]

If someone pays up front for a service to be delivered over a period, you have a liability, no matter whether on a cash or accrual basis.

The difference is that you can recognize the revenue on receipt of the cash, but at the same time, you also recognize the liability to deliver the service (based on COGS etc for the liability).

The liability reduces as you expense (and actually pay on a cash basis) the cost of supplying the service.

At least that's my non-accountant idea of how it works.

I may be completely wrong.