There are many reasons why you might choose to use either cash or accrual accounting. How do you know which is right for your not for profit organisation?

Cash accounting is more suited to small organisations that don’t have high volume of transactions, most expenses are paid and income received within a short period such as less than 30 days. Therefore, the need to track debtors and creditors is not as critical as you simply don’t have them or they are small in number.    Also, if you don’t buy or sell stock or if you do but it is a minor part of your business then cash accounting may be more suitable.

In addition, you may also receive your income as actual cash such as from fees paid on the day, donations or sales that are made where the buyer pays direct into your bank account at the time the sale actually occurs.  Furthermore, cash accounting has a very immediate and short term perspective as you are only recording transactions when you either receive the cash or pay the cash which also makes it harder to take a longer term view and plan for the future.

Accrual accounting provides more details on the financial performance of the organisation, makes it easy to track debtors and creditors and matches the income and expenditure better to give a more accurate view of the financial performance of the organisation.  Also, if you buy and sell stock and maintain an inventory system then accrual accounting should be used.  It also makes it easier to plan for the future as accrual accounting provides a more medium to long term view of the financial performance of the organisation.

Another factor that is important is the type of and size of organisation you are.  ASIC and the Australian Taxation Office (ATO) provide guidelines about this as well as the application of the different accounting standards that your organisation needs to comply with.  As an example, in relation to GST the ATO uses a threshold of annual turnover of $2 million, in conjunction with other criteria, to determine whether you can use cash accounting.  Follow this link to the ATO website that provides an overview of when you should use cash or non-cash accounting in relation to GST.

When deciding between cash or accrual accounting, the essential issue is to determine what your financial reporting needs are, what are the main types of transactions that occur and whether there are any legal obligations.

For instance, if you are a small organisation, where most of your transactions are in cash, you don’t sell stock, don’t have complex financial reporting needs and ASIC and ATO does not require you to prepare accrual accounts then cash accounting may be more suitable.  For larger organisations where you have higher turnover, transactions mainly occur via credit and therefore you have many debtors and creditors, you sell stock and need to accurately manage your inventory then accrual accounting should be used.  Even if some of these issues don’t apply you still may need to prepare your accounts on an accrual basis to comply with ASIC and ATO requirements.

If it is all too hard, try the Admin Bandit accounting software for volunteer treasurers.  Our system and support will make the job easy.