Explanation of the Design Manager Accrual Based Accounting System and links to articles that explain why accrual method is generally accepted and the cash method is not.
Design Manager is an accrual based accounting system. Design Manager uses a standard project-cost accrual method of accounting where items are invoiced as they are generally delivered (or when work is performed) or the contract completion method of accounting per the GAAP ARB-45 can be employed, see below. This means that client deposits are held in a liability account on the balance sheet, cost of goods is held in a work in process account on the balance sheet. When the client invoice is done (signifying the completion of the order or contract or the delivery of certain line items) the deposit is transferred to revenue and the work in process is transferred to Cost of Goods Sold (COGS). This causes profit to be recorded together in the same fiscal period as the client invoice. For a more detailed explanation of work in process (WIP), see here.
Accounts Receivable in an Accrual Based System:
At the time that the client invoice is created is when the revenue is recorded, the COGS is recorded, and the sales tax is owed. Client invoices then wait in accounts receivable until they are paid. Deposits from clients are not considered revenue or to have sales tax owed on them until the client invoice is created and the deposit is applied to the invoice.
Income is defined as gross profit minus expenses plus other income. Gross profit is revenue minus cost of goods sold.
Accounts Payable in an Accrual Based System:
When the vendor invoice (bill) is entered, the vendor deposit is applied and moved to work in process (so long as the client as not been invoiced) and then eventually to COGS (by the client invoice posting). The unpaid vendor invoice balance waits in accounts payable until a check is written. Deposits made to vendors for a purchase order (PO) are not considered as COGS and are held in an asset account on the balance sheet until a final invoice (invoice for the balance owed on the PO) is received from the vendor.
The Contract Completion (Completed-Contract) Method of Accounting:
This accounting method defers all the profit on a project (or phase, such as room location, area of a project) until the completion date. During the period that work is being accomplished, all costs incurred are debited to an inventory account called "Work in Process". When a completed proposal or contract is billed (invoiced to the client) the total invoice is debited to Accounts Receivable and lines are credited to Revenue. Costs associated with the billed items are transferred from WIP to COGS along with the Revenue being record by the client invoice. Note: In 2014 the USA is switching from GAAP to IFRS accounting standards. Under the IFRS standards, the Contract Completion Method is no longer allowed; this means that items must be invoiced as the work is perform or when they are generally delivered to the end client site, you can no longer hold the deposit monies until the end of the project or phase, the deposit must be applied and invoices done piece-meal as work is completed or items delivered. Since Design Manager automatically distributes your client's deposit among the line items in the project, this works beautifully.
For More Information and Information about Accounting Methods and GAAP:
For a detailed expiation of accounting methods, see http://en.wikipedia.org/wiki/Accrual_basis_accounting
And the IRS: http://www.irs.gov/publications/p538/ar02.html#d0e1567