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

About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit provides a wholistic SMSF assistance, education and administration service continuum - 1. “assistance” is help of whatsoever nature where our overall SMSF experience and knowledge enables us to provide assistance/help without any legal (or “license”) limitations. 2. “education” involves providing knowledge through teaching, coaching and mentoring about all matters SMSF, including (but not limited to) investment issues such as equities and property, 3. “administration” encompasses all admin aspects of legally required SMSF trustee and member record keeping including (but not limited to) audit and ATO matters. In keeping with our key point that SuperBenefit does not provide Financial Advice, where issues arise from 1, 2, and/or 3 above Indicate a need for a legally authorized provider (such as a Financial Adviser) and the client does not have their own service provider, the client can utilize SuperBenefit’s ‘Connect Assist’ … SuperBenefit, in itself, does not provide Financial Advice, but it does provide the wherewithal for great SMSF service. WE do not provide Financial Advice or any other service that requires a legally authorized provider. However, where such advice or service is required we have our ‘Connect Assist’, a SuperBenefit resource we use to connect clients to a Licensed Advisor or other legally authorised service provider. Call us 0407 361 596, no obligation FREE Connection call to see how we can help you!
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