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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