USA Cost-basis accounting and unpaid labor

[sparksh]

I have a S-corp consulting business and my tax advisor wants me to use cost-basis accounting. I'd like to have some way for my books to show hours worked but not yet invoiced. He suggested that I use a "Liabilities/Deferred Revenue"
account:

As work is done:

debit: Assets/Invoices, credit:Liabilities/Deferred Revenue​

When I send out an invoice:

debit: Assets/Receivables, credit:Assets/Invoices​

When the check arrives:

debit: Liabilities/Deferred, credit:Revenues
debit: Assets/Checks, credit:Assets/Receivables​

When the check clears:

debit: Assets/Cash, credit: Assets/Checks​

Everything cancels out so the net effect is:

debit: Assets/Cash, credit: Revenues
​

I understand the idea of using "Liabilities/Deferred Revenue" for labor paid but not performed. But in my case, I have labor performed but not paid. At the end of the last accounting year, I had a lot of un-invoiced hours on the books. This had the effect of making my debit ratio look bad. Somehow that seems wrong. All those hours represent client liabilities rather than my liabilities. Would make more sense to use a contra-account "Assets/Deferred Revenues"? How should this be done and what is the appropriate name for this kind of account?

Thanks

 

[Samir]

I can see how this could make your balance sheet not look good. I'm surprised that the deferred rev account isn't a asset contra-account since this balance doesn't truly reflect a liability.

I'm not that familiar with cost-basis accounting, so maybe someone else can chime in with some better advice.

 

[sparksh]

The correct term is "Cash-basis accounting." But it appears that no one is familiar with it. Even accounting textbooks have only a short dismissive paragraph. It's only for lemonade stands I guess.

 

[Samir]

The correct term is "Cash-basis accounting." But it appears that no one is familiar with it. Even accounting textbooks have only a short dismissive paragraph. It's only for lemonade stands I guess.

Cash basis and cost-basis are two different things. Cash basis is simpler, so there may not be as much to teach about it.