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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Bookkeeping Services – BAS Agents Registration

If you are an individual or entity providing BAS Services in your own right for a fee or reward you are required by law to be registered as a BAS Agent.

Exceptions- You do not need to register as a tax or BAS agent if you are:

  • An employee of an organisation that prepares business activity statements for their employer’s business
  • An employee of a registered tax or BAS agent and you do not provide tax agent or BAS services in your own right
  • A legal practitioner providing tax agent or BAS services as a legal service under a state or territory Legal Profession Act and do not prepare and lodge returns or return like statements such as: ­   business activity statements, instalment activity statements, superannuation guarantee statements, pay as you go withholding payment summary statements
  • A legal practitioner providing tax agent or BAS services as a legal service under a state or territory Legal Profession Act in the course of acting for a trust or deceased estate as a trustee or legal personal representative
  • A customs broker licensed under the Customs Act 1901 providing a BAS service relating to imports or exports to which an ‘indirect tax law’ (as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)) applies.

If you fall into the the above categories of providing a BAS Related Service, you will also be required to meet the following Qualification Obligations:

Option 1:

  • Have been awarded a Certificate IV in Financial Services (Bookkeeping) or (Accounting) from a registered training organisation or equivalent institution, and
  • Have successfully completed a Board approved course in basic GST/BAS taxation principles (which may be included in the Certificate IV).

OR Option 2:

  • Have been awarded a higher award than a Certificate IV in the field of bookkeeping or accounting from a registered training organisation or equivalent institution (for example, a Diploma, Advanced Diploma or Degree), and
  • Have successfully completed a Board approved course in basic GST/BAS taxation principles (which may be included in the higher award).

AND

  • Be at least 18 Years of Age
  • Have 1,400 hours of relevant experience or if a member of a Professional Association, 1,000 hours
  • Hold current Professional Indemnity Insurance
  • Be a fit and proper person
  • Pay the application fee

Please watch the attached video for more detail and feel free to contact us for more information about our Bookkeeping Services.

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