Cash and accrual accounting

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

  • not required 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
  • an organisation with a low turn-over and limited, low value assets and liabilities, few employees and a simple structure.

Attention - Important information! Transitional reporting arrangements. For the 2014 reporting period only, medium and large charities who currently report on a cash basis can continue to provide information to the ACNC on a cash basis. Find out more information by reading about our transitional reporting arrangements.

Differences between cash and accrual accounting

The main difference between cash accrual accounting is the timing of when revenue and expenses are recorded. Cash accounting records revenue when the money is received and expenses when the money is paid out. Whereas, accrual accounting records revenue when it is earned and expenses when they are incurred.

Cash accounting only records when money changes hands, either when it is received or paid. It does not record payables and receivables. Accrual accounting records all transactions in the reporting period, when income is earned or expenses are incurred – this includes recording payables and receivables.

For example: a charity is told it will receive a regular monthly donation of $50, under the cash method, that amount is not recorded in the books until the donor hands you the money or you receive it in the bank account. Under the accrual method, the $50 is recorded as revenue immediately, even if you do not receive it right away.

The same thing occurs for expenses. If you pay $6000 in wages each month, under the cash method, the amount is not added to the books until you pay the wages. However, under the accrual method, the $6000 expense is recorded in advance for each month.

Differences between cash and accrual accounting

Cash accounting

Accrual accounting

  • Records when money changes hands, either when it is received or paid.

     

  • Receipts are recorded when received, for example, the bookkeeper records the donation when the charity receives the actual cash.

     

  • Expenses are recorded when paid, for example, the bookkeeper records employee wages when they are paid out by the charity.

     

  • No receivables are recorded, for example, where a charity sells goods but has not been paid yet, the bookkeeper does not record anything.

     

  • No payables are recorded, for example, where a charity has an electricity bill and has not paid it, the bookkeeper records nothing.
  • Records all transactions - when income is earned or expenses are incurred – in the reporting period.

     

  • Revenue is recorded when it is earned, which may be before or after payment is received, for example, the bookkeeper records the donation when the charity receives the donation form containing the donor’s bank details and donation amount. 

     

  • Expenses are recorded when they are incurred, which may be before or after they are paid, for example, the bookkeeper records employee wages as an expense for the reporting period even if they have not been paid yet.  

     

  • A receivable is recorded when revenue is earned but payment has not been received, for example, where a charity sells goods but has not been paid yet, the bookkeeper records the earning for the reporting period.

     

  • Payables are recorded when a debt is incurred but payment has not yet been made, for example, when a charity receives an electricity bill but has not paid it yet, the bookkeeper records it as a payable for the reporting period.

Small charities - cash or accrual accounting

Use these points to help you decide whether to use cash or accrual accounting*:

Cash accounting

Accrual accounting

  • Is more intuitive and easier for non-accountants to use and understand
  • may not provide a reasonable view of the organisation's liquidity
  • does not capture obligations that are due but not paid - costs that will have to be incurred later, or income that's been earned but not yet paid to the charity
  • may not give a complete picture of what's actually occurred, only on what money has passed hands
  • does not recognise any future provisions such as employees’ long service leave
  • does not capture the measurement concept from the Australian Accounting Standards, and may not show a complete picture of the financial position of the organisation.
  • Gives a fuller, more complete picture of the organisation’s financial performance (how it has gone) and financial position (its net wealth)
  • recognises the effects of transactions and other events in the financial years in which they occur, whether or not cash has been received or paid
  • provides more detailed financial information and helps decision makers make more informed decisions
  • shows a complete financial position of the organisation. Responsible financial management requires all known and anticipated income and expenditure to be accounted for. A charity may become insolvent if it is not able to meet all its debts as and when they become due and payable, and only with accrual accounting can this position be determined
  • requires a more in-depth  understanding of accounting and bookkeeping principles

* These points are only suggestions and not intended to capture all circumstances. Make a decision based on your charity’s situation and get professional advice if you are unsure.

Tips on cash accounting

  • Consider treating credit 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

More information

Related resources

External resources