Cash and accrual accounting

Medium and large charities must use accrual based accounting in their financial reports from 2015 onwards.  Small charities may use either accrual or cash accounting, if:

  • they are not compelled to use accrual accounting under their governing documents (such as their rules, constitution or trust deed) or by any other  government department or agency, or funding body and
  • their annual revenue is less than $250,000.

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:

Cash Method
Journal entry 21 Jan  Journal entry 21 Feb Journal entry 21 Mar
Dr Bank            $50        Dr Bank            $50 Dr Bank            $50
Cr Revenue      $150 Cr Revenue       $50  Cr Revenue       $50
Accrual Method

Journal entry 1 Jan (initial entry)

 
Dr Receivable   $150  
Cr Revenue      $150  
Journal entry 21 Jan      Journal entry 21 Feb Journal entry 21 Mar
Dr Bank            $50 Dr Bank            $50 Dr Bank            $50
Cr Receivable    $50 Cr Receivable    $50 Cr Receivable    $50

Attention - Important information! ACNC comment 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. 

Cash Method

Accrual Method: 

Journal entry 1 Dec      Journal entry 1 Dec  
Dr rent  $12000 Dr rent $ 1000
Cr Bank  $12000 Cr Bank $12000
   
Dr Prepaid Rent    
$11100
If you consider the end of year report for this charity the rent expense would be recorded as follows:
  Cash Method Accrual Method  
    20x7       20x7   

   

Rent Expense $23 000*    $12 000^

 

Attention - Important information! ACNC comment 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.

*From January 1 to November 30, the charity paid the landlord $1 000 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.

^ From January 1 to November 30 the charity paid the landlord $1 000 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 ($1 000) and the remainder is recorded in a prepayment account as an asset in the balance sheet ($11 000).  Therefore the total is $11 000 + $1 000 = $12 000.

Tips on cash accounting
  • Consider treating debit card transactions as cash
  • Keep a list of all assets (including long term assets) – if your operations are straightforward you can use 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

Related resources

External resources