Choosing the Cash or Accrual Accounting Method

One of the most important decisions your agency must make is choosing between the Cash and Accrual accounting methods.

Vertafore recommends checking with your agency accountant or financial advisor before making this important decision.

Accrual Basis Cash Basis

When revenue and expense transactions are posted on their effective dates, the accounting system is described as Accrual Basis Accounting.

Under Cash Basis Accounting, revenues are reported when cash is received and expenses are reported when cash is paid.

The cash vs. accrual selection in Agency Setup controls when posting occurs to important income and expense accounts.

Posting of commission income in AMS360 cash-basis accounting is dependent on whether or not the invoice is Paid in Full. When an invoice is posted, the commission income is recorded to a "Deferred Income" account (GL account #21410-21475), which are current liability accounts on the Balance Sheet.

The income remains in the deferred income account until such time as a receipt, check, or a journal entry brings the invoice balance to zero. At the time it reaches a zero balance, AMS360 moves the income from deferred to the actual commission income account on the later of the payment or the invoice effective date.

Monies originally applied On Account must be applied to an invoice and that invoice brought to a zero balance before income is posted. For more on how to accomplish this, see Apply Money Between Invoices.

Posting of commission expense in AMS360 cash-basis accounting is dependent on when cash is paid out. When an invoice is posted the commission expense is recorded to a "Deferred Expense" account (GL #21132-21133 or 21136-21137), which are current liability accounts on the Balance Sheet.

The expense is moved from the deferred account as it is paid.  If the commission is paid in part, AMS360 moves the paid portion of the expense from deferred to the actual commission expense account on the later of the payment or the effective date. This is true for agency and direct bill invoices.

Click the link below to open a chart illustrating one posting example of cash basis accounting. Other GL accounts can be involved depending on the type of policy and sequence of events.

Posting of commission income and expense in AMS360 accrual-basis accounting is dependent on the invoice effective date:

  • If the invoice effective date is less than or equal to the current date, the system posts the invoice to the appropriate payable, income and expense accounts at that time.
  • If the invoice effective date is greater than the current date, income and expenses are not posted until Daily Process is run on or after the invoice effective date.

Click the link below to open a chart illustrating one posting example of accrual basis accounting. Other GL accounts can be involved depending on the type of policy and sequence of events.

If the agency later wants to change accounting methods, the conversion process is:

  1. Delete accounting data. All accounting transaction history is lost.
  2. Enter new beginning balances.
  3. Re-enter all accounting transactions, which occurred after the beginning balances.
  1. Open the Administration Center.
  2. On the Agency Overview toolbar, click Edit. The Agency Setup data entry form appears.
  3. Expand the Accounting Options section.
  4. Choose Accrual or Cash from the Accounting Basis group box. Accrual is the default.