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Cash and non-cash (accrual) accounting

What is accrual accounting, when do I need to pay attention to this, and what are the impacts?

Short answer: You must do your accounting on an accrual basis when your revenue is more than $10 million (Australia) or £150,000 (UK), below that you're can use a cash basis.

Now for the longer answer :)

At the heart of accrual accounting is the principle of trying to show your revenue (in your P&L) in the time period that you've earned it, not when you've invoiced it, nor when you've been paid for the work.

So typically: you do the work (ie you've earned it), then send an invoice, then collect the cash.

As an example, if you do some consulting in February you might send an invoice for your work in early March for 5,000 + GST / VAT and get paid in April.

If you're operating on an accrual basis, then you include your invoice for 5,000 + 500 GST in your January - March BAS / VAT return and pay the ATO / HMRC their 500 GST / VAT ... even though you, yourself, may not yet have been paid by your customer.

Because of the cash juggling of most small businesses, the ATO / HMRC provide a small business concession and allow you to operate on a cash basis if your income is below $10 million in Australia or £150,000 in the UK (noting you can choose to be on an accrual basis at any time).

The choice of operating on a cash or accrual basis is made when you first start your business / setup your company.   When you're small, for cash management reasons, it can be easier to be on a cash basis, but ultimately you'll be on an accrual basis, and it actually better represents the true income and expenses of your business on a month-to-month basis.

When you've reached the AU / UK threshold, take note of the timing and notify the ATO / HMRC of the change (or we take care of this for you) ... you would typically do this from the start of the next financial year.

Note that when changing from cash to accrual your first GST/ VAT  paid through your BAS / VAT return may be larger than the previous quarter's as any invoices that were issued ... but not yet received will now have their GST / VAT owing.

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