What’s the difference between Cash or Accrual Accounting?
As a small business, it’s important to know the difference between the two methods of calculating your amounts stated in your business financial reports- Cash Reporting and Accrual reporting- and it’s all in the timing! Here’s your quick guide:
Cash Reporting – This method records income when cash is received in your bank, and expenses when money is paid out of your bank. This income and expenses are always reported in the financial period that the cash transaction occurred.
Although you can opt for accruals, most small businesses in the Macarthur area that the team at Figure 8 Accounts have come to know, generally report on a cash basis. However those with a turnover of more than $10 million must report on an accruals basis. Businesses that get paid immediately may find cash flow easier to manage on a cash basis.
Although not always as accurate as the accrual system, cash reporting is generally simpler and an easy option for BAS.
Accrual Reporting – This method records income when a customer is invoiced, and expenses when suppliers issue bills.
Contrary to Cash reporting, income and expenses in accrual reporting is reported in the financial period the transaction was created, regardless of whether payment has been made or received.
This method is generally better suited for businesses that do not get paid immediately, as it may give a more accurate picture of their financial position. Accrual reporting does require more detailed bookkeeping, however gives a longer-term view, as opposed to cash reporting which gives a short-term picture of your accounts. Accrual reporting can be useful for accurate planning and can help drive more informed decision making.
Tax Returns & BAS
When it comes to your Business Activity Statement, many small businesses will be registered for cash reporting. However generally, tax agents report income tax returns on an accrual basis. For this reason, the accrual system gives a more accurate financial picture for income tax calculation.
If you’re unsure which reporting method is right for your business, or if you need help or guidance on financial reporting for BAS and Tax, the friendly team at Figure 8 Accounts would be happy to help guide you in the right direction. Simply give us a call or submit an enquiry to arrange an appointment at our Gregory Hills office, located in Sydney’s South West.