Choosing your accounting method might not sound as exciting as optimizing your photos or adjusting your nightly rates, but it can have just as big an impact on your business. The way you recognize income and expenses determines how accurate your books are, how smoothly tax season goes, and how clearly you can see whether your rental business is truly profitable.
Many vacation rental hosts start with the cash-basis accounting method because it is simple. However, short-term rentals bring unique challenges, such as prepaid bookings, cancellations, and refunds, that make accrual accounting worth a serious look. In this guide, we'll explain both accounting methods, share their advantages and disadvantages, and show how OwnerRez can help streamline your accounting so you can focus on building your business.
How Cash Basis Accounting Works
Cash-basis accounting is the “money in, money out” method. In this method, income is recorded when the money hits your account. Likewise, expenses are recorded with the date you paid them. The IRS generally allows small rental businesses to use cash-basis accounting, making it a popular and easy starting point for most operators.
The Positives:
- Easy to understand and track
- IRS approved for most small businesses
- Works if you only manage a few properties or are just getting started
- Keeps bookkeeping light without the need to track liabilities
The Downsides:
- Income and expenses often do not match the period in which they will occur
- Prepaid bookings can skew reports, making it hard to understand true profitability
- Refunds can create messy and confusing entries
- Creates the possibility of paying taxes on income that could potentially be refunded at a later date
Examples:
- Pre-paid Bookings
Let's say a guest sends you $2,000 in mid-November for a stay scheduled in January. Using the cash basis accounting method, that money shows up as November revenue even though the stay has not happened. When reviewing reports, November will look strong, but January will look weaker than it really is. - Refunds
Next, let's say that the same guest who booked in mid-November cancels at the last minute, and you process the refund in January. On a cash basis, the refund is recorded in January, which will show up as negative income or as an unrelated expense. Either way, it makes your January numbers harder to interpret, and you would have already paid taxes on that lost income. - Expenses
Lastly, let's say you receive a $600 insurance bill for coverage from January through June. You pay it on January 12th, and under the cash-basis accounting method, the entire $600 is recorded as a January expense. Your January expenses will look higher than normal, even though the insurance benefits stretch six months. This can be easy to interpret when you manage only a few properties; however, it gets harder to analyze when you begin to scale.
How Accrual Basis Accounting Works
Accrual-basis accounting records income when it is earned and expenses when they are incurred, not necessarily when money changes hands. This method matches revenue to the period in which the bookings occurred, giving a clearer picture of profitability.
The Positives:
- Aligns income and expenses with the actual stay
- Makes prepaid bookings and refunds easy to track without messy adjustments
- Provides more accurate reports for evaluating booking profit, matching occupancy to revenue, and securing financing for new rental properties.
- Preferred method for growing rental businesses or managing multiple properties
The Downsides:
- Slightly more complex to set up and maintain
- Requires tracking liabilities such as Pre-paid rent
- May feel like extra work without the right software partner
Examples:
- Pre-paid Bookings
Suppose a guest books a three-night stay in February and prepays $1,500 in December. Under accrual accounting, that $1,500 is recorded in December as a liability (deferred revenue) since the stay hasn’t happened yet. Then, when the guest stays in February, the $1,500 is recognized as income. This approach keeps your December financials accurate and ensures February reflects the correct revenue, along with the related costs like cleaning and utilities. - Refunds
Now, imagine that same guest cancels in January. Because the $1,500 was originally recorded as a Deferred Revenue liability and not as income, you simply reverse it out of the liability account and refund the guest (or apply your cancellation policy). There’s no need to adjust prior reports or show negative income. This keeps your books clean and ensures that only revenue from completed stays is reported, making your tax filings simpler and more accurate. - Expenses
Lastly, let’s say you receive a $600 insurance bill that provides coverage from January through June. Under accrual accounting, you first record the $600 as a Prepaid Expense (asset) in January. Then, each month you allocate $100 from Prepaid Expense to Insurance Expense, reflecting the portion of coverage that applies to that month. This way, January shows $100 in insurance expense instead of the full $600, and each subsequent month records its share. By spreading the cost, your reports show a more accurate view of monthly profitability, especially when comparing months or planning cash flow.
Why This Matters for Vacation Rentals
Short-term rentals move on a different schedule than many other small businesses. Guests often pay months in advance, bookings get canceled, and deposits are collected and sometimes refunded. This is where your choice of accounting method really matters.
With cash-basis accounting, a busy month can look overly profitable because of advance payments, while quieter months may appear weaker than they actually are. Accrual accounting smooths everything out by recognizing income when the booking actually happens, giving you a more accurate picture of your rental business.
For hosts who want clean, reliable reporting, especially if you work with lenders, partners, or are planning to expand, accrual provides the accuracy you need. When it comes to choosing the best bookkeeping method for vacation rentals, accrual accounting almost always comes out ahead.
The Trade Offs
Cash basis is simple and easy to start. Accrual requires a little more effort because you must track liabilities and shift revenue into the correct booking periods. The good news is that powerful software like OwnerRez makes this much easier. With tools like the OwnerRez QuickBooks integration, many of the tedious adjustments can be made automatically. The complexity that once made accrual accounting feel overwhelming is now primarily handled seamlessly behind the scenes.
How OwnerRez Works with Our QuickBooks Integration
The great news is that OwnerRez can make accrual accounting incredibly simple. With the OwnerRez QuickBooks integration, your bookings, payments, and bank deposits flow automatically into QuickBooks following accrual accounting rules.
Creating the Invoice
When a booking is created in OwnerRez, an invoice is automatically generated in QuickBooks. Each line item on the invoice can be mapped to specific Products and Services in QuickBooks, so charges can be tracked across different accounts for more detailed reporting.
The way revenue is recognized depends on the invoice date setting in OwnerRez. You can choose whether the invoice uses the Booking Created Date or the Arrival Date:
- If the invoice date is set to the Created Date, QuickBooks recognizes the revenue immediately, which mirrors cash-basis reporting.
- If the invoice date is set to the Arrival Date, QuickBooks won’t recognize the revenue until the guest’s stay begins. This aligns more closely with accrual-basis accounting.
By adjusting these settings, you can control how QuickBooks Online reflects revenue timing and ensure your reports match the accounting method you prefer.
Recording Payments
The next step is handling payments. When a guest payment is received in OwnerRez, a corresponding payment is automatically recorded in QuickBooks Online. You can choose which account to map these payments to, but we recommend using QuickBooks’ Undeposited Funds account.
Undeposited Funds works as a temporary holding account for money you’ve collected but haven’t yet deposited into your bank. Think of it like the cash drawer at a store or an envelope where you keep checks until you make a bank deposit.
On your Balance Sheet, Undeposited Funds appear as an Other Current Asset, separate from your actual bank accounts. This separation makes it clear how much cash is waiting to be deposited versus what has already been deposited into your bank.
Making the Deposit
Finally, if you are using one of the recommended payment processors, OwnerRez automatically tracks when the payment is physically deposited into your bank account. This allows us to create a matching Bank Deposit record in QuickBooks Online.
During this process, payments are linked to their corresponding invoices, and any credit card or channel fees are recorded as well. The Undeposited Funds account is then credited (reduced), and your bank account is debited (increased), accurately reflecting the movement of funds from temporary holding to your actual bank balance.
And the best part is that all of the above happens automatically with no interaction needed from you!
For more information about our QuickBooks Integration, you can read more here:
You will get all the benefits of accrual accounting without all the manual work, keeping your books accurate in real time. OwnerRez also offers a wide variety of reports, which can cover most situations where you'd want to extract data that has been collected. The vast majority of these reports can be exported to Excel and/or CSV files, allowing you to perform your own research using the data.
Final Thoughts
Your accounting method shapes how clearly you see your rental business. Cash-basis is simple, but accrual accounting gives a truer picture of profitability by matching income and expenses to the actual stay. OwnerRez makes this easy by automatically tracking bookings, payments, refunds, and unearned revenue through QuickBooks. With accurate, up-to-date books, you can make smarter decisions and focus on growing your rental business.
Ready to simplify your accounting and take control of your financials? Get started with OwnerRez today!
FAQs About Accounting Methods for Vacation Rental Hosts
Q: What’s the difference between cash-basis and accrual accounting?
A: Cash-basis records income when received and expenses when paid. Accrual records income when earned and expenses when incurred, giving a more accurate view of profitability.
Q: Which accounting method is better for a small vacation rental with one property?
A: For a single property or a new host, cash-basis accounting is simpler and IRS-approved for small businesses. However, if you’re using the QuickBooks integration in OwnerRez, accrual accounting is just as easy to manage and provides more accurate reporting of income and expenses.
Q: When should I consider switching to accrual accounting?
A: Accrual accounting is beneficial if you manage multiple properties, want more accurate monthly reporting, handle prepaid bookings and refunds regularly, or are planning to grow your business. It aligns income and expenses with the period the stay actually occurs, giving a truer view of profitability.
Q: How does prepaid booking income work under each method?
A: With cash-basis accounting, prepaid income is recorded when you receive the payment, even if the stay occurs later, which can make monthly revenue look uneven. Under accrual accounting, the payment is first recorded as a Deferred Revenue liability and only recognized as income when the guest’s stay happens, giving a more accurate view of revenue for each month.
Q: How are refunds handled in each accounting method?
A: In cash-basis accounting, a refund is recorded when it’s issued, which can create confusing negative income in a prior month. In accrual accounting, the refund simply reduces the liability or expense in the period it was originally recognized, keeping your books clean and accurate.
Q: How should I record multi-month expenses like insurance or taxes?
A: In cash-basis accounting, the entire payment is recorded when it’s paid, which can overstate monthly expenses. Accrual accounting spreads the cost over the months the expense covers, giving a realistic picture of monthly profitability.
Q: Will accrual accounting make tax season more complicated?
A: Not necessarily. Accrual accounting may feel more complex, but powerful software like OwnerRez with the QuickBooks integration automates the tracking of all revenue, payments, and deposits. This reduces manual work and improves accuracy.
Q: How can OwnerRez help with accounting for vacation rentals?
A: OwnerRez helps automate your “quote-to-cash” process by connecting to QuickBooks Online to automatically create invoices, record payments, and generate bank deposit records. This lets you produce reports for analysis, streamlines accounting procedures, reduces errors, and keeps your books accurate in real time.
Q: Can I still use cash-basis accounting if I integrate OwnerRez with QuickBooks?
A: Yes. OwnerRez supports both cash-basis and accrual accounting. The main difference between the two is when revenue is recognized. QuickBooks Online determines this largely based on the invoice date, and our integration lets you choose whether invoices use the Booking Created Date (cash-basis) or the Arrival Date (accrual). You can start with the method that fits your business needs and switch to accrual later for more detailed reporting.
Q: Which method gives the clearest picture of profitability for vacation rentals?
A: Accrual accounting provides the most accurate view of your rental business. It recognizes revenue when it is earned and expenses when they are incurred, giving a true reflection of monthly performance.