Cash or Accrual Accounting for Management Reporting?

In Australia, you have a choice to remain on a cash basis for lodging your BAS while your Turnover remains under the $2M threshold. The advantages of this are if you have outstanding debtors you do not have to pay GST on those sales until the cash is actually received. The problem is that cash reports are meaningless if you are trying to monitor the performance of your company. If you incurred wages to provide a service in period 1 then you want the revenue to appear in that period, not in the period the money was actually received. This is called the Matching Principal in Accounting. Luckily, bookkeeping software such as Xero, MYOB and Quickbooks allow you to remain on Cash for your BAS reporting while running Accrual based reporting for your Management Reports.

Hybrid Basis

The Hybrid basis of Management Reporting allows you to capture all of your costs and revenue in the same period to get a true measure of how you are performing each month. You just need to be sure that all of your Suppliers Invoices and Sales Invoices are entered in the month that the transaction took place and be sure to run all of your Management Reports on an Accrual basis while leaving our GST Reports on a Cash basis.

3rd Party Add-ons

In specialist industries such as Legal, Property or Healthcare, there are many 3rd Party Add-ons integrate with your Accounting Software to provide you with Industry Specific requirements that your standard Software can’t provide. While most of these applications claim to have a “seamless Integration” with your bookkeeping software, you will find that the integration is actually driven by exporting General Journals. The problem with this is that many of these products are unable to differentiate between Cash or Accrual on a General Journal which makes it very difficult to produce both Cash and Accrual Reports on a Hybrid basis.

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Cash v Accrual Accounting

Occasionally, when we do an audit on the accounts of new clients we find that the previous bookkeeper has been keeping the accounts on a cash basis. This means that they are entering revenue and expenses when they are paid, not when they were incurred.

With modern accounting software such as MYOB and Quickbooks, there is no excuse to keep accounts on a cash basis and it usually reflects laziness on behalf of the previous bookkeeper.

Accrual accounting is based on the matching principle. That means that for any given period, you need to match the revenues with the expenses incurred for the period to enable you to use those accounts as a true measure of performance. A simple example of this is where a salesman may have an extremely successful month resulting in a large increase in sales for the month which earns him a bonus. The bonus may not be paid until the next month, however in measuring the increased profitability for the month you would want the bonus to be deducted from the increased revenue. An accrual accounting system will allow you to expense the bonus in the month it was incurred, even if it is paid later on down the track.

Some business owners confuse the cash v accrual basis for their management accounts with what basis they are registered for their BAS. If you are registered to report your BAS on a cash basis, you can still run a cash BAS out of MYOB or Quicken if you are keeping management accounts on an accrual basis.

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