| The tax authority require bookkeeping records | | | | from December 1 to February 28 which was paid |
| to calculate the tax due. The choice for | | | | by the small business owner by cheque on |
| small business is basically cash accounting | | | | December 31 and a year end date also of |
| or accrual accounting each of which has | | | | December 31 |
| advantages and disadvantages. | | | | |
| | | | On a cash basis the rent would not |
| The date of the sales invoice and the date of | | | | technically be included in the accounts as it |
| purchase invoice are known as the tax point. | | | | would be shown as a rent payment from the |
| The tax point does not determine the spread | | | | business bank account on January 2 or later |
| of that transaction over the tax period which | | | | if cashed by the recipient at a later date. |
| can be different when accounts are prepared | | | | Therefore that quarters rent would be |
| on an accruals basis as opposed to a cash | | | | included in the following year accounts not |
| basis. | | | | the current year as issuing a cheque is not a |
| | | | payment but actually a promise to pay. |
| For the purposes of cash accounting the | | | | |
| effective inclusion of the transaction in the | | | | Assuming the rent was paid in cash prior to |
| financial records is the date the cash or | | | | the 31 December then the whole 3 months rent |
| bank receipt or payment was made. The tax | | | | would be included in the current financial |
| point date on the document is not the | | | | year. That treatment may have distorted the |
| deciding factor to include the item in the | | | | accounts as more or less than 12 months rent |
| accounts. The date the amount was paid out or | | | | might have been included in the tax |
| received into cash funds or bank account is | | | | calculations. |
| the date to be used fopr inclusion in the | | | | |
| accounts. | | | | On an accruals basis the rent invoice would |
| | | | have been entered in the accounting records |
| There are disadvantages to maintaining | | | | with an effective date of December 1. The |
| accounts on a cash basis in that records must | | | | accountant or small business owner preparing |
| be kept of all payments received and paid out | | | | the accounts would deduct 2 months from the |
| and those records supported by the actual | | | | qaurterly amount leaving one months rent in |
| primary accounting documents to which they | | | | the current year accounts with the other 2 |
| relate. That entails matching the financial | | | | months being included the following year. |
| documents to the payments and receipts | | | | |
| records, a feature many small businesses | | | | That is more accurate as the other side of |
| might find onerous as record keeping ios | | | | the accounting would be for that same |
| often regarded by samll business as an | | | | accountant or bookkeeper to further include |
| administrative burden. | | | | the 2 months rent not already claimed to be |
| | | | included in the tax calculation for the next |
| Virtually all professional accountants adopt | | | | financial year. Mvoing the prepayment not |
| an accruals basis for clients accounting | | | | specific to the accounting period is how |
| purposes as it is based upon recording all | | | | business treats a prepayment under accrual |
| financial information whether relevant to the | | | | accounting. |
| tax period or not and then adjusting the | | | | |
| management accounting profit indicated to | | | | When operating cash accounting only |
| produce the net taxable profit or loss. | | | | transactions actually paid for or received |
| | | | are valid. On an accruals basis provisions |
| By operating an accruals basis all financial | | | | can be made for costs incurred by the |
| documents are recorded according to the tax | | | | business whicvh have not yet been invoiced. |
| point date. If every transaction was paid or | | | | |
| received within the year then the cash | | | | Cash accounting might appear easier but has |
| accounting and accruals basis would produce | | | | the disadvantage of maintaining receipts and |
| the same tax accounts. | | | | payments records in addition to the primary |
| | | | documents which should also be matched to the |
| The main adjustment a small business or the | | | | financial transactions to support the |
| accountant might make to accounts prepared on | | | | accounts. |
| the accruals basis is to first prepare the | | | | |
| set of accounts according to the tax point of | | | | Accrual accounting is based upon recording |
| the primary accounting records and then | | | | all financial transactions and then adjusting |
| examine those transactions and adjust them | | | | the end result to determine the most accurate |
| according to their relevance to the financial | | | | net taxable profit. The accruals basis is |
| period for which the accounts are being | | | | favoured by accountants as it reaches an |
| prepared. | | | | accurate tax liability as opposed to more or |
| | | | less tax being payable on the cash basis |
| A typical example of the difference would be | | | | according to the credit control policies and |
| the rent invoice for the business premises. | | | | practises of the business its suppliers and |
| Let us assume a quarterly rent invoice was | | | | clients. |
| received dated 1 December for the 3 months | | | | |