The difference between cash basis and accrual basis accounting comes down to timing.
When do you record revenue or expenses? If you do it when you pay or receive money, it’s cash basis accounting. If you do it when you get a bill or raise an invoice, it’s accrual basis accounting.
Businesses that use cash basis accounting recognise income and expenses only when money changes hands. But because this doesn’t take upcoming expenses into account, it could leave you with the idea that you have a higher balance than you actually do!
Businesses that use accrual accounting recognise income as soon as they raise an invoice for a customer. And when a bill comes in, it’s recognised as an expense even if payment won’t be made for another 30 days. This means you have to watch invoices, not just your bank account.
For income tax purposes, its good practice to prepare year-end information on an accrual basis.
Written by Mackay Bailey. To speak to one of our professionals, contact Mackay Bailey today on 03 341 0930 from New Zealand, or visit www.mackaybailey.co.nz