One of the first decisions practice owners need to make when setting up their optometry practice is which accounting method they will use. This often leads to the realization: “Wait, there’s more than one way to do accounting?”
Yes, there are two primary methods: cash basis and accrual. The difference between them comes down to when transactions are booked.
For example, I recently had an eye exam. My practice includes screening photos with all comprehensive exams for $39. I also picked out an incredible pair of Anne et Valentin glasses with progressive lenses (for those who have heard me talk about wearing glasses despite my +0.25 Rx, near vision isn’t happening anymore). Let’s break down how each accounting method would handle the revenue and expenses from that visit.
Cash Basis Accounting
Most practices will use cash basis accounting: it’s simple, straightforward, and leaves little room for manipulation. With this method, revenue and expenses are recorded the day the funds reach or leave the practice.
Take my eye exam, for example. On the day of my visit, part of the revenue from my exam (the screening fee and my copay for the exam and eyewear) was recorded that day when I paid. However, the portion covered by my vision care plan (VCP) wasn’t recorded until weeks later when the claim was processed and paid. Interestingly, the cost of my Anne et Valentin frames was accounted for weeks or even months before my visit. In cash basis accounting, inventory is expensed as soon as it’s purchased—not when it’s sold.
Cash basis is the most “honest” method of accounting, but it is limited. Because revenue and expenses can be spread out over weeks and months, optometry practices might struggle to get a clear picture of their revenue and profits in the short term. Also, since revenue isn’t booked on the same day as the cost of goods sold, getting an accurate view of gross profit by product category becomes nearly impossible.
Over longer periods, these timing issues tend to balance out. This is why Books & Benchmarks reports our metrics over a trailing 12-month period, providing a clearer and more accurate picture of performance.
Accrual Accounting
In accrual accounting, revenue and expenses are recorded on the date they are earned or incurred. So, in my earlier eye exam example, both the fees I paid that day and the future insurance reimbursement would be booked on the date of the exam. Similarly, the cost of my frames would be moved from inventory to the profit & loss (P&L) statement on the day of my visit.
Accrual accounting provides a more precise picture of a practice’s expenses and profitability, especially for narrower periods. However, it’s not without its trade-offs. First, it’s significantly more complex to manage operationally.
Inventory must be tracked precisely so that the cost of each frame can be shifted from the balance sheet to the P&L when it’s sold. Explanation of Benefits (EOB) statements have to be reconciled closely so that net revenue can be booked on the date of each exam.
Additionally, bills are recorded when they’re issued (accounts payable) and later cleared when paid. Meanwhile, future revenue is logged as accounts receivable, with adjustments made when only part of a claim is reimbursed.
Because of these complexities, accrual accounting can be more susceptible to manipulation, particularly on the revenue side.
Which is Better?
In case you’re wondering, Books & Benchmarks uses cash basis accounting for our optometry bookkeeping services. While we’d love to fully transition to accrual accounting someday, the reality is that most practices don’t yet have the systems in place to accurately track and accrue revenues and expenses. In fact, I only know of one practice that I’m certain is doing true accrual accounting, and a handful are using a modified “accrual-lite” approach.
That said, if you report your taxes on an accrual basis, that doesn’t mean we can’t help you! Converting cash to accrual is as simple as making a few additional year-end adjustments. If you just want someone else to sort all these questions out for your practice’s financials, consider giving Books & Benchmarks your monthly bookkeeping. We’ll ensure your financial statements are accurate, ready when you need them, and useful to you as you work to grow and understand your practice.
Are you ready to take the stress out of your practice’s finances? Contact Books & Benchmarks today, and let’s discuss how we can support your business!
