The Difference Between Cash Accounting and Accrual Accounting

The two chief accounting methods the accountants follow for accounting in Hobart are the cash accounting method and the accrual accounting method. These two accounting methods display their difference when small businesses in Hobart recognize their revenues and expenses.
The cash method helps to recognize both the revenues and expenses when cash changes hands. Alternatively, the accrual method helps the business to recognize the expenses and revenues, when the revenues were earned, rather than when they have been paid.


For instance, when the contract says the business owner has to sell 1500 widgets by the end of the year, to be delivered and then paid for in the next year, then you get a calendar tax year.

Example of The Accrual Method

According to the Accrual Accounting method, the revenue is recognized in a particular month, even though you did not receive the cash yet. Having the account receivable generated, and then it places the revenue to the current tax year. As a business owner, you have to report the revenue in the present tax year, even if you shall receive the actual cash in the next year.
But it is possible to claim expenses in the present year, by using the accrual accounting method, although you are not going to pay cash till the next year.
For instance, you know well you have to order $15,000 worth of the supplies for building and delivering the 1500 widgets. So, right on receiving the order, you are entering into a contract for purchasing the $10,000 worth of the materials. But you cannot expect to receive or paying for the materials till the next year.
According to the accrual method, you are accounting for the expenses when you have taken on the obligation for paying when you are not actually paying. You take up the expense, when it is a liability on your business books, and not when you are writing the check.
Therefore, both the expenses and revenue for the present year ending month, the 1500-widget order are well booked for the present year calendar year returns.

Example of The Cash Accounting Method

As stated by the cash accounting method, you are not booking the revenue unless you receive the payment on the order. Similarly, you shall not book any other expenses unless you have paid them out. As seen in the widget example, both your expenses and revenues will be reported in Q1 for the present and next year.
Several business owners in Hobart need to use the Accrual method to file the tax returns, and the exceptional ones are the fishers, farmers, and the commissioned sales people. If you belong to any of these three categories, you have the freedom to choose between the cash or accrual accounting method. To get detailed information on the cash accounting method, contact the accountants of the reputed accounting firm in Hobart.
The two methods cannot be mixed. As a business owner, you will not be able to use the cash method for expenses and the accrual method for revenue. You need to be consistent.

The Advantages of The Accrual Accounting Method

Due to its more accurate reflection of long term business health and viability, the accrual method is chosen. For instance, a business having a lot of cash on books, but a greater set of liabilities in the next quarter, then it can look much better with the cash accounting method. But with the accrual method, the short term difficulties of the business becomes more evident.

A Few Essential Accounting Tips Shared by the Accountants
• A daily journal of all the expenses and receipts should be kept.
• Everything should be stored along with the canceled cheques, receipts, duplicate deposit slips, and the documents supporting the transactions’ amount and timings.
• They must be uploaded to the Cloud as they are made, so that they are stored securely offsite, absolutely safe from any kind of mishaps like hard drive crashes, vandalism, thefts, floods, and fires.

Changing Accounting Methods

Being eligible for the cash method helps you to change methods as described below:
i. To change to the Cash Accounting Method from the Accrual Method
• Filing returns under the cash accounting method
• Attaching a statement listing all adjustment to income and expenses because of the changes in method

ii. To change From the Cash to the Accrual  Method
• Sending a request for doing so to the Tax agents or ATO in writing before the date on which your tax return is due.

Hiring the bookkeeping, accounting, and taxation accounting professionals make it easy for your business with the financial controls and reducing costs in the process. Despite your industry size location or the type, the accountants are ready to help you with the accounting needs.

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