Small Business Accounts

Cash Basis Accounting

Cash basis accounting is a method of accounting in which revenue is recognised when cash is received, and expenses are recognised when they are paid. In other words, transactions are recorded only when cash changes hands.

For example, if a company sells a product for £100, the revenue is not recognised until the customer pays the £100. If the company buys supplies for £50, the expense is not recognised until the company writes a check or pays the bill.

Cash basis accounting is simpler than accrual basis accounting, which recognises revenue when it is earned and expenses when they are incurred, regardless of whether the cash has changed hands.

In simple terms, cash basis accounting is a way of keeping track of a company's financial transactions based solely on when cash is received and spent.

Information for Cash Basis Accounts

To prepare cash basis accounts, you will need the following information:

1. Bank statements: This will show all cash inflows and outflows for the time period being considered.
   
   

2. Receipts: This will show all cash received for sales, collections, and other transactions.
   
   

3. Invoices: This will show all cash paid for expenses, such as supplies, rent, and other bills.
   
   

4. Ledgers (spreadsheet): This will show all transactions recorded in the general ledger, including date, description, amount, and account classification.
   
   

5. Financial data: This may include previous financial statements, budgets, and other relevant financial information that can help you prepare accurate and complete cash basis accounts.
   
   

6. Time period: Determine the time period for which you want to prepare the cash basis accounts, such as a month, a quarter, or a year.
   
   

Having all of this information available will help you to create accurate and complete cash basis accounts that provide a clear picture of the company's financial position and performance.

Prepare Cash Basis Accounts

To prepare cash basis accounts, follow these steps:

• Choose a time period: Decide on a time period for which you want to prepare the cash basis accounts, such as a month, a quarter, or a year.

• Gather data: Collect all relevant financial data for the chosen time period, including bank statements, receipts, and invoices. Make sure that all transactions are properly recorded and accounted for.

• Record income: Record all incoming money, such as sales and collections, in a income ledger. Include the date, description, and amount of each transaction.

• Record expenses outgoing: Record all outgoing expenses, such as payments and disbursements, in a cash outflow ledger. Include the date, description, and amount of each transaction.

• Calculate cash balance: Add up all cash inflows and subtract all cash outflows to find the cash balance at the end of the time period.

• Record transactions in the general ledger: For each transaction, record the relevant information in the general ledger, including the date, description, amount, and account classification.

• Prepare a trial balance: Check that the total of all debit entries in the general ledger equals the total of all credit entries. If the trial balance does not balance, review the transactions and make necessary adjustments.

• Prepare financial statements: Use the information in the general ledger to prepare the company's financial statements, including the balance sheet, profit and loss statement, and statement of cash flows.

• Present the accounts: The final cash basis accounts should be neat, accurate, and easy to understand, and should provide a clear picture of the company's financial position and performance.

Accrual Accounting

Accrual accounting is a method of accounting that records transactions when they occur, regardless of when payment is made or received. This means that revenue (income) is recorded when it is earned, and expenses are recorded when they are incurred, even if the payment has not been received or made yet.

For example, if a business provides a service in February and the customer pays in March, accrual accounting would record the revenue in February when the service was provided, rather than in February when payment was received. 

This method provides a more accurate picture of a business's financial performance by considering all economic events that have taken place, rather than just the cash transactions.

Information for Accrual Accounts

To perform accrual accounting, you will need to gather and track the following information:

1. Sales invoices: To record revenue (income) when it is earned, regardless of when payment is received.
   
   

2. Purchase invoices: To record expenses when they are incurred, regardless of when payment is made.
   
   

3. Contracts and agreements: To check the terms of revenue and expenses, such as payment terms, delivery dates, and amounts.
   
   

4. Bank statements: To track cash transactions and balance them with accrual-based financial statements.
   
   

5. General ledger (spreadsheet): To record and categorise transactions, such as accounts payable, accounts receivable (money owed by debtors), and inventory (list of goods or stock).
   
   

6. Accounting software: To automate and simplify the accrual accounting process, provide real-time financial reporting, and comply with financial reporting standards.
   
   

Having accurate and complete information is crucial for effective accrual accounting, as it helps to provide a more comprehensive and accurate picture of your business's financial performance.

Prepare Accrual Accounts

To prepare accrual accounts, you can follow these steps:

• Record transactions: Collect and record all transactions in the general ledger (spreadsheet), including sales invoices, purchase invoices, and bank statements.
  
  

• Adjust for accruals: Adjust the accounts to reflect accrual-based revenue (income) and expenses, such as recognising revenue (income) when earned, and expenses when incurred.
  
  

• Prepare the balance sheet: Use the recorded transactions and adjusted accounts to prepare a balance sheet, which shows the assets, liabilities, and equity of the business at a specific point in time.
  
  

• Prepare the income statement: Use the recorded transactions and adjusted accounts to prepare an income statement, which shows the revenue (income), expenses, and profit or loss of the business over a specific period of time.
  
  

• Reconcile accounts: Reconcile the accrual-based accounts with the cash-based accounts, such as the bank statements, to ensure that the financial statements are accurate and consistent.
  
  

• Review and revise: Review the financial statements, identify any differences or errors, and make any necessary revisions.
  
  

Having a good understanding of accrual accounting and following these steps can help you prepare accurate and comprehensive accrual accounts for your business.