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