Understanding Cash and Accruals Bookkeeping and Accountancy
At On The Money Bookkeeping Services Melbourne, we’ve noticed that business owners are sometimes uncertain about why their BAS amount payable is considerably higher or lower than what they are expecting.
For most businesses, an activity statement reports GST, PAYG withholdings (for employees) and PAYG instalments (for company tax). GST is calculated on sales made by the business, less the GST paid on purchases.
Most small businesses report their BAS on a cash basis, while their annual tax return is done on an accruals basis. The accruals method is often preferred for financial reporting, but the cash method of BAS reporting is better for cash flow for most small businesses.
What’s the Difference?
There are two ways of calculating the GST amounts: cash or accruals (sometimes called non-cash). The difference is quite simple, and it’s all about the timing.
Accruals reporting measures a transaction by the date it took place, either the date of a sales invoice or the date of a supplier’s bill, regardless of any payments made or received.
Cash reporting measures a transaction by the payment date, in other words, when money was received and paid out of the bank. Sometimes payment doesn’t occur until days, weeks or even months later. If you’re reporting on a cash basis, what’s important are the dates that the cash was received for the sale or spent on purchases, whereas in accruals reporting, the critical dates are when the sale invoice or supplier bill was raised.
For example, your business might have made many sales in a quarter, but customers paid in the next quarter.
On a cash basis, this would mean that you report less GST on sales for that quarter than your sales actually reflect, which would result in you paying less GST in that quarter and more in the following quarter (once customers have paid). On an accruals basis, you would pay GST on all sales for the quarter, whether you have received payment or not, meaning a higher amount on the BAS.
What are the benefits of choosing one method over the other?
Cash reporting is used by most small businesses to make it easier to manage cash flow. If you have already received payment for sales, then you will more likely have the cash for the next BAS payment available.
Businesses with a turnover of more than $10 million must use accruals reporting; however, businesses with a lower turnover can choose to use accruals reporting.
Some small businesses can benefit from reporting GST on an accruals basis. An example is a business that needs to pay for their goods or services upfront (often COD or 7-day payment terms) but offers extended payment terms to their customers. In this scenario, they’ve spent money on purchases (and GST), but they’ve not yet collected cash on the sales that they’ve made. Instead, they want to be able to get a refund from the ATO for the GST they’ve spent via purchases, without having to give the ATO the GST on the sales that they’ve made but not yet been paid for. Due to the lag between paying expenses and receiving income, this kind of business can potentially struggle with cash flow and could benefit from using accruals BAS reporting.
Check Your Settings
- Check your GST registration method in your ATO business online services or by referring to a previously lodged BAS, which will show the reporting basis.
- Check your software setup. Many accounting software platforms default to accruals settings and must be changed to cash.
- Check that you are running the BAS and financial reports on the correct basis. For example, you may want to run a cash profit and loss statement to check that it matches your BAS. Equally, you may want to run an accruals profit and loss to compare the sales generated in a quarter to payments received.
Cash and Accrual Bookkeeping and Accountancy
Talk to us today if you’d like to review your business processes and financial accounts. Swapping from one reporting system to the other will require a GST adjustment which is essential to get right. On The Money Bookkeeping Services Melbourne will help you get clear about the best BAS and financial reporting for your business.