Most of the time, many business owners get confused when they have to choose between cash and non-cash (accrual) accounting methods for their transactions. Most commonly, large businesses like to use accrual accounting for GST, on the other hand, small businesses have a choice between cash and non-cash (accruals) accounting methods for GST. Both accounting methods have benefits, so it depends on the individuals to learn about these methods to make the right decision.
Cash-Basis Accounting Method
This is one of the simplest accounting methods for small businesses because financial transactions are recorded when cash flows. Your business expenses and income are recorded when they are paid, not when you receive or issue an invoice.
You can have a good idea about cash flow, but when it is a matter of matching revenue produced with expenses, you may feel that you must have chosen another way of accounting for GST. The following are some benefits that you can have with cash accounting for GST:
• Cash accounting is easy and simple to understand as compared to other types of accounting methods. Due to this reason, many businesses choose the cash-basis accounting method.
• It allows easy management of the cash flow of your business, especially your GST payments to the ATO.
• It allows you to analyse the financial status of your company more easily.
• If your business has a high volume of cash transactions, then you should use this method.
Non-Cash Accrual Accounting
When the revenue is earned and when an expense is incurred, the accrual accounting method is used that involves the record of these transactions. The transactions are recorded when expenses and revenues are incurred, not when they are paid.
Many businesses run on payment terms. These postponed payment terms create accounts payable liabilities and accounts receivable assets. Under the accrual accounting method for GST, when an invoice is issued to a client, the payments are recorded. The following are the benefits of using the non-cash (accrual) method for GST:
• The accrual accounting method allows you to record accounts payable and accounts receivable if your company accepts payment terms.
• You can have a better long-term picture of the performance of your business.
Which Accounting Method is the Best for GST Purposes?
It is easy to manage cash flow when you use cash accounting for GST when your activity statements and actual money flow match closely. When you use the accrual method, GST is payable on all sales for which you received an invoice during the period, even if you didn’t get the actual payment.
On the other hand, you can also deduct GST from upfront costs that haven’t been paid. You therefore have an advantage when you claim GST when you initially receive the invoice for major transactions. Moreover, you can search for bookkeeping and accounting services to handle these types of tasks to bookkeeper or accountant so you can make a business strategy to grow your business.
For Tax Purposes
Even though they utilise accrual accounting in other areas, many organisations use cash-based reporting for tax purposes. The cash approach may be preferable for service-based firms, whereas the accrual technique may be better for manufacturing or trade.
You, as the business owner, are in charge of deciding which accounting technique is best for your enterprise. Choose cash accounting if simplicity is what you’re after, but accrual accounting is preferable if you want to better understand your financial situation and make some revenue estimates. Moreover, when it is a matter of tax, you should ask a tax accountant to handle your tax matters. If you want someone near your area, you can also search for the term, ‘tax accountant near me’ to get the list of accountants, and you can choose one that better matches your requirements.
Whether you have a small business or you are an owner of a large company, now you know what accounting method you should use for GST and tax purposes. As a business owner, you need to know about these types of accounting approaches for GST and taxes. For more information, you can also get suggestions from the best and most Reliable Bookkeeping Services provider.