MASTERCLASS Investment – Cash and Accrual Accounting – What is the difference?

MASTERCLASS Investment – Cash and Accrual Accounting – What is the difference?

Investment – Cash and Accrual Accounting – What is the difference?

Cash and Accrual accounting are the 2 ways companies report on their financial statements. And when planning for SMSF investing, understanding them is a foundation to reading the financials of a company.

Cash accounting records receipts are recorded during the period they are actually paid/received, and expenses are recorded in the period in which they are actually paid.

Accrual accounting records sales/revenue and expenses when they are incurred/billed.

When used – Small Businesses often use cash accounting because it is simpler and more straightforward, and it provides a clear picture of how much money the business actually has on hand. Companies, however, are required to use accrual accounting under generally accepted accounting principles (GAAP).

As an example,

Consider company X who orders some computers from company Y in Oct, but pays in Nov

By accrual the sale is recorded in Oct by company Y

By cash the sale is recorded in Nov when ACTUALLY received

Another example,

If company Y needs to pay their supplier for the computers, they may have ordered in Aug  and received early sept, but paid late Sept.

By accrual the Expense is recorded in Aug

By cash the sale is recorded in Sept – when ACTUALLY paid

One drawback of cash accounting is that it doesn’t provide an accurate picture of sales yet to be received (accounts receivable) nor expenses to be paid (liabilities or accounts payable) that have been incurred but not paid for, so the business might appear to be better off than it really is.

In all accrual accounting gives the BEST picture of a business.

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

Advertisements

About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit will SET UP your SMSF and provide investment education for a better result. We take care of all your administration, accounting, ATO lodgement and audit of SMSFs, working with you and your advisors. If you want advice we can arrange one of our recommended advisors and accountants to meet with you, as we do not give advice, but take instruction only. Take control of your super, including property shares and other assets. Learn how to be your own advisor - make better decisions - by being mentored and coached to invest your own super wisely and strategically by qualified partners. Book to come to an event to find out more, or - Call us 0407 361 596, no obligation FREE strategy call.
This entry was posted in Investing - Stock Fundamentals, Masterclass Investment, SMSF Investing and tagged , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s