If submitting their annual financial report to the ACNC, charities will use either cash or accrual accounting.

  • Medium and large charities must use accrual-based accounting in their financial reports
  • Small charities may use either cash or accrual accounting as long as they are not compelled to use accrual accounting by their governing documents (rules, constitution or trust deed) or by any government department or agency, or funding body.

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.

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 $50 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

Cash Method

Accrual Method

Journal entry 1 Dec Journal entry 1 Dec
Dr Rent $12,000 Dr Rent $1000
Cr Bank $12,000 Cr Bank $12,000
Dr Prepaid Rent: $11,000

If you consider the end of year report for this charity the rent expense would be recorded as follows:

Cash Method

Accrual Method

Reporting period (year) 20XX 20XX
Rent Expense $23,0001 $12,0002

1 From January 1 to November 30, the charity paid the landlord $1000 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.

2 From January 1 to November 30, the charity paid the landlord $1000 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 ($1000) and the remainder is recorded in a pre-payment account as an asset in the balance sheet ($11,000). Therefore the total is $11,000 + $1000 = $12,000.

Tips on cash accounting

  • Consider treating debit card transactions as cash
  • Keep a list of all assets (including long term assets) – for example, keep an asset register using 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.