Show When preparing their annual financial report for submission to the ACNC, charities will use either cash or accrual accounting. Medium and large charities must use accrual-based accounting in their financial reports Small charities may use either cash or accrual accounting, unless they must use accrual accounting in accordance with their governing document (rules, constitution or trust deed), or by any government department or agency, or funding body. From the 2022 Annual Information Statement, small charities using cash accounting have an additional option to describe their assets and liabilities. The main difference between cash and accrual accounting is the timing of when revenue and expenses are recognised in the books. Cash accounting records revenue when money is received and expenses when money is paid out. Accrual accounting records revenue when it is earned and expenses when they are incurred. Therefore, cash accounting does not record payables and receivables, while accrual accounting does.
On January 1, a donor enters into a regular giving arrangement for three months with a charity for a monthly donation of $50. The charity's financial reporting period is 1 January to 31 December. Under the cash method, the amount is not recorded until the $50 is received in the charity’s bank account. Under the accrual method, the $50 is recorded in advance of receiving the cash. Assuming that the donation is received on the 21st of each month:
By raising a receivable, a charity is able to keep a track of the money a donor owes or has paid them through the books. Under the cash method, a charity may not be fully aware of their future entitlements at any given point in time.
For the last 12 months, a charity has been paying $100 per month to a website provider to host their website. The provider normally increases the subscription by 2% per annum from 1 December each year. However, if the charity pays the subscription 12 months in advance, the increase will not apply. The charity decides to pay upfront, and pays the $1,200 to the provider on 1 December 2021. The charity's reporting period is 1 January to 31 December.
If you consider the end of year report for this charity, the subscription expense would be recorded as follows:
Cash method: From January 1 to November 30, the charity paid the provider $100 a month in subscriptions (11 x $100 = $1,100). On December 1, the charity paid another $1,200 to the provider. Therefore, the total is $1,100 + $1,200 = $2,300. Accrual method: From January 1 to November 30, the charity paid the provider $100 a month in subscriptions (11 x $100 = $1,100). On December 1, the charity paid another $1,200 to the provider. Under the accrual method only the amount that relates to December is recognised ($100) and the remainder is recorded in a pre-payment account as an asset in the balance sheet ($1,100). Therefore, the total is $1,100 + $100 = $1,200.
The accrual method better captures the subscription expense for the 12-month reporting period, as the accrual system considers the timing of when expenses should be incurred.
Here's a quick guide to help you understand cash and accrual accounting to help you decided which method is right for your business.
Cash accounting
Cash accounting tracks the actual money coming in and out of your business. In cash accounting, when you:
For example, if you send an invoice on Tuesday, and don't get payment in your account until Thursday, you record the income under Thursday's date in your books. Pros and cons of cash accountingCash accounting:
However, it doesn't show money that is owed to you or money you owe to others.
Accrual accounting
If you use accrual accounting, you record expenses and sales when they take place, instead of when cash changes hands. This way of accounting shows the amounts you owe to people and the amounts owing to you. For example, if you're a builder and send an invoice for a project you've completed, you record the sale in your books even though you haven't been paid yet. Pros and cons of accrual accountingAccrual accounting:
Accrual accounting is more complicated than cash accounting so you'll need an in-depth understanding of bookkeeping methods or a professional to help you out.
Choosing a method
To work out which method best suits your business, think about:
If you aren't sure, talk to a professional.
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