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