Cash or Accrual Accounting – Let Your Accountant Help You Choose

Owning or managing a business or company requires technical and business skills and knowledge, and while it can be extremely rewarding, it is also challenging and carries with it much responsibility. The successful owner or manager also needs a range of tools to help them manage the business undertaking and one of the best tools they can have is a robust accounting system. With it, they can keep track of sales, establish profit or loss and provide accurate records for tax purposes. However, a key decision that must be made very early in the life of the business is whether that accounting system should be run on a cash or accrual accounting basis.

Put very simply, a cash system operates much like a cheque account, where cash comes in and expenses go out of the business account, at the time the transaction takes place. Accrual accounting records income that has been earned but not yet received, and expenses that have been incurred but not yet paid for. To make this decision, consultation with an accountant Brisbane is a must as an expert opinion is needed.

Typically, cash accounting suits a business that doesn’t carry any inventory, employs no or few staff, doesn’t have a big turnover and is usually preferred by independent contractors and people with service-type businesses. While it is easier to record daily transactions under this method, especially for the inexperienced, it may not truly reflect the actual value of the business at any given point in time.

Accrual accounting is the generally preferred method of keeping business records. It is used by large and small businesses alike and is an essential tool for keeping track of all the resources of a business. It not only records income and expenses, but also allows the amortisation and depreciation of assets and liabilities to be spread over a specified period of time.

Even a small business that has started out with a cash system, but begins to grow, should consider the transition to an accrual system, especially if the business carries inventory. An accrual system brings the expenses to account at the same time as the corresponding income, enabling the business to accurately match the income with the cost of goods sold. Some inventory can remain unsold for many months, and the cash system records the entire cost of these items at the time they are purchased by the business. This can mask the true financial position of the business, which can cause problems when it comes to accurately calculating tax Brisbane.

The range of software accounting packages available these days means it’s relatively simple to set up an accounting system, with some basic bookkeeping skills. However, the most important decision is still whether to choose cash or accrual accounting. The future of the business may depend on it.

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