South African companies are required to prepare their financial statements using IFRS (International Financial Reporting Standards) or IFRS for SMEs (International Financial Reporting Standard for Small and Medium-sized Entities).
IFRS requires the use of the Accrual Basis of Accounting.
The other basis of accounting is the Cash Basis of Accounting (which is not allowed by IFRS).
In this article, we compare the Cash Basis of Accounting to the Accrual Basis of Accounting, so you can:
- understand the differences between the two and,
- see why the Accrual Basis of Accounting provides a more accurate picture of a business’s finances.
The Cash Basis Accounting
With the Cash basis of accounting we record revenues and expenses in the books only when cash is actually received or paid.
So a sale will be recorded when the customer pays us for it.
n this scenario, the expense is incurred in February when they deliver the training. After they have delivered the training in February, we have an obligation to pay them, even though we will only pay them later in April.
Therefore, the expense is recorded in February
| January | February | March | |
| Sales | 1,000.00 | ||
| Costs | 10,000.00 | ||
| Profit | 1,000.00 | (10,000.00) | – |
A Simple Example
