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