If a company uses a cash method of accounting, which of the following statements will be true?

If submitting their annual financial report to the ACNC, charities will use either cash or accrual accounting.

• Medium and large charities must use accrual-based accounting in their financial reports
• Small charities may use either cash or accrual accounting as long as they are not compelled to use accrual accounting by their governing documents (rules, constitution or trust deed) or by any government department or agency, or funding body.

Differences between cash and accrual accounting

The main difference between cash and accrual accounting is the timing of when revenue and expenses are recognised in the books.

Cash accounting records revenue when money is received and expenses when money is paid out. Accrual accounting records revenue when it is earned and expenses when they are incurred.

Therefore, cash accounting does not record payables and receivables, while accrual accounting does.

Revenue Case Study:

On January 1, a charity signs a three-month contract with a donor which confirms a monthly donation of $50. The charity’s financial reporting period is 1 Jan to 31 Dec.

Under the cash method, the amount is not recorded until the $50 is received in the charity’s bank account.

Under the accrual method, the $50 is recorded in advance of receiving the cash. Assuming that the donation is received on the 21st of each month:

By raising a receivable a charity is able to keep a track of the money a donor owes or has paid them through the books. Under the cash method, there is a chance a donor never pays the charity, perhaps through an administrative error and the money could never be received by a charity.

Expense Case Study:

For the last 12 months a charity has been paying $1,000 a month in rent.

The landlord normally increases the charity’s rent by 2% per annum from 1 December each year. However, the landlord tells the charity that if it pays the rent 12 months in advance, she will not increase the rent for that period.

The charity decides to accept the offer, and pays $12,000 to the landlord on 1 December 2017. The charity’s reporting period is 1 January to 31 December.

The accrual method better captures the rental expense for the 12-month reporting period, as the accrual system considers the timing of when expenses should be incurred.

1 From January 1 to November 30, the charity paid the landlord $1000 a month in rent (11 x $1000 = $11,000). On December 1, the charity paid another $12,000 in rent. Therefore the total is $11,000 + $12,000 = $23,000.

2 From January 1 to November 30, the charity paid the landlord $1000 a month in rent (11 x $1000 = $11,000). On December 1, the charity paid another $12,000 in rent. Under the accrual method only the amount that relates to December is recognised ($1000) and the remainder is recorded in a pre-payment account as an asset in the balance sheet ($11,000). Therefore the total is $11,000 + $1000 = $12,000.

Tips on cash accounting

• Consider treating debit card transactions as cash
• Keep a list of all assets (including long term assets) – for example, keep an asset register using a spreadsheet
• Keep sufficient financial and operational records so your charity can prepare true and fair financial statements and be audited if required
• To support planning, consider preparing a cash flow budget. This should include future expected one-off or large payments, such as rates or insurance premiums
• Where valuations were used to determine the value of assets and liabilities, make sure they are relevant and reliable and include sufficient records to show how the amounts were determined.