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Cash v. Accrual: Why certain reports do not agree with other reports

Broadly speaking there are two ways to report accounting information. Revenues and expenses can be measured on either a cash basis or accruals basis:

  • Cash Basis: Revenue is recognised in the period that money is received and expenses are recorded in the period in which money is paid.

  • Accrual Basis: Revenue is recognised in the period in which the sale is made, regardless of when money is received. Expenses are recorded in the period in which the purchase occurs, regardless of when the payment is made.

What method you use can vary according to different circumstances:

  • How you report to the business' management and shareholders (internal reporting);

  • How you report to the ATO, ASIC and/or ASX (external reporting); and

  • How you account for GST.

For example, you may maintain your internal books on a cash basis by tracking receipts and payments (a "cashbook"), but your accountant may convert this to the accruals method by adding back debtors, creditors and stock on hand at year end. Therefore you are reporting to the ATO on an accruals basis.

Another example is that you may account for GST using cash or accruals regardless of your internal reporting standard. So you may do all your internal reporting on an accruals basis but submit the Business Activity Statement on a cash basis for cash flow reasons.

Using accruals for internal, external and GST reporting is the most natural and easily understood method. This is because all the mechanisms that make reporting meaningful (stock categories, tax codes etc) are recorded against the original invoice/purchase. When cash reporting is used, the system must calculate backwards from the cash entries to obtain the details about the items in those transactions. This is slower, clumsier and there are circumstances where it may present the same information differently (for example, if you reverse a receipt and then re-receipt against different invoices).

So even if your business is "cash-based" — in other words, your customers pay immediately and you pay your suppliers immediately — it is preferable to generate accruals-based reporting. And of course, it doesn't make any arithmetic difference.

The majority of Cadzow 2000 reports use accruals, however some provide cash reporting. Unless you have no debtors and no creditors, these reports will never agree with each other for any given period.

For example, you issue an invoice dated 01/05/2004 for $100 and the customer pays on 15/07/2004. On a Cash basis, the revenue is recognised in July (of the 2004/2005 financial year). On an Accruals basis, the revenue is recognised in May (of the 2003/2004 financial year).

Therefore a sales report for 2003/2004 using accruals will not agree with a sales report for 2003/2004 using cash.
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