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Re: Cash or accrual accounting method?

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Newbie

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Hi I have started a new business but I’m not entirely sure on which method to use. Can you please differentiate between the two and clearly explain what each of them means and pros and cons if each of them. Any help will be massive.
I’m running a clothing business online. Thank you
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Devotee Registered Tax Practitioner

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@harveyspec @macfanboy 

 

Harvey,

 

This question can cause contention for Business Owners and Tax Accountants.

 

I believe the main question is does a Business Owner wish to track Receivables and Payables within the Accounting Software. Each type of business is different.

As a business becomes larger, Accounting Systems becomes more important.

 

One can use the Cash method for GST and Non-Cash for Income Tax/Management Accounting.

 

Technology is improving so more Business Owners have accounting software and use the software to track their Receivables and Payables. 

 

My preference is to use the Non-Cash method for Management Reporting.

It may be that a Business Owner gets both a Non-Cash and Cash P&L from the accounting system.

 

I do suggest to Business Owners that monthly Accounting is important tracking margins, trends etc.

Tax Accountants historically have been interested in the annual Tax Return.

 

Hope this helps.

 

Duncan

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Newbie

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@macfanboy perhaps you can help me with this one? regards

Taxicorn

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Best answer

Devotee Registered Tax Practitioner

Replies 0

@harveyspec @macfanboy 

 

Harvey,

 

This question can cause contention for Business Owners and Tax Accountants.

 

I believe the main question is does a Business Owner wish to track Receivables and Payables within the Accounting Software. Each type of business is different.

As a business becomes larger, Accounting Systems becomes more important.

 

One can use the Cash method for GST and Non-Cash for Income Tax/Management Accounting.

 

Technology is improving so more Business Owners have accounting software and use the software to track their Receivables and Payables. 

 

My preference is to use the Non-Cash method for Management Reporting.

It may be that a Business Owner gets both a Non-Cash and Cash P&L from the accounting system.

 

I do suggest to Business Owners that monthly Accounting is important tracking margins, trends etc.

Tax Accountants historically have been interested in the annual Tax Return.

 

Hope this helps.

 

Duncan

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Devotee

Replies 0

@harveyspec 

 

I'd suggest using the cash method if you have a small online business selling clothes. @DuncanS is correct - when your business gets bigger accounting systems and methods are very important but you can always change to accurals in the future. I agree that you should be doing your bookkeeping etc each month as a minimum to ensure you know what's going on - it also helps you manage cash flow and easily prepare your BAS and income tax return when the time comes. 

 

To give you an example - if you are reporting GST quartely on a cash basis and you invoice someone in the last month of the quarter (e.g. June) and you don't get paid until July you don't need to report and pay the GST until you receive the money (so the next July  - Sept BAS). If you were on accruals you would need to report and pay the GST in the June BAS regardless of the fact that you haven't actually been paid for the invoice. 

 

The method determines when you need to report and pay the GST, so:

Accurals - when you receive an invoice or you invoice someone

Cash - when you actually receive or pay the money 

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