There are two methods of calculating the amounts stated in business financial reports, and the difference is all in the timing.
Cash reporting – income is recorded when cash is received in your bank, and expenses are recorded when money is paid out of your bank.
In cash reporting, the income and expenses are reported in the financial period that the cash transaction occurred.
Most small businesses report on a cash basis (although they can opt for accruals), but those with a turnover of more than $10 million must report on an accruals basis. Businesses that get paid immediately may find cash flow easier to manage on a cash basis.
Cash reporting is generally simpler and an easy option for the BAS, although it’s not always as accurate as the accrual system is.
Accrual reporting – income is recorded when a customer is invoiced, and expenses are recorded when suppliers issue bills.
In accrual reporting, the income and expenses are reported in the financial period that the transaction was created, regardless of whether a payment was received or made.
Businesses that don’t get paid immediately may have a more accurate picture of their financial position using an accrual basis, although it requires more detailed bookkeeping. While cash reporting gives a short-term picture of your accounts, accrual reporting gives a longer-term view and is more accurate for planning and decision making.
BAS and Tax Returns
Many small businesses are registered for cash reporting for the business activity statement, but the tax agent generally reports the income tax return on an accrual basis. The accrual system gives a more accurate financial picture for income tax calculation.
Sometimes it isn’t always clear! We’re here to help make it simpler, so get in touch if you’d like to understand more about your financial reporting for BAS and tax.