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Accrual Accounting vs. Cash Accounting (#ACTACCVSCSH01)

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20130531 (Andy)   n/a   n/a   n/a   n/a
  • You may also be interested in our article "Using StorMan for Accrual Accounting" (#ACTACCRUAL01)

Introduction

Hello, my name is Stephen - chief accountant and owner here at StorMan Software. So often, our Technical Support team gets asked questions about why their cash accounting reports don't seem to agree properly and the implication is that something is wrong with StorMan. On the contrary, the problem is not with StorMan, but in the fact that we are asking a question that cannot be easily answered.

 

Accrual Accounting takes on the Cash

Let's take the following example of transactions that can easily occur on a regular basis:

Cash vs. Accrual Accounting - Sample

Now let's consider the following question. When this customer makes a payment of $360.00 on 15/09/2012, what is the $360.00 for?

A) Rental Fee
B) Rental Fee + Insurance + some Deposit
C) Archive Boxes
D) Reduction of the amount owing of $400
E) None of the above

 

Now with all multiple choice questions there is generally one that is completely wrong and, if you answered 'C', then unfortunately you have just failed the StorMan test (although I'm sure some would vow and declare it is!). So that leaves us with four more options. We all know that it's more than just Rental Fee so we can eliminate 'A' as well. So that just leaves 'B' and 'D' and 'E'.

If you answered 'B', I can now have a good discussion with you. Because if you say it's for Rent & Insurance and some of the Deposit, then I'm going to contest it and tell you that it's really Rent and some of the Deposit but no Insurance. Others will forcefully tell me that it does include Insurance because that's the smallest amount. So why have an argument, when we can easily move on to the remaining two options?

For those who answered 'E', that's not correct either - because it truly does matter that the payment is for something - and indeed it is!

 

So... what is the correct answer?

Accrual accounting tells us that the easiest answer is actually 'D' - and here's why. With accrual accounting you code all your receipts (customer payments) to 'Accounts Receivable' (or 'Customer Receivables') to 'Debtors' - whichever you like to call it. I like to call it 'Customer Receivables' which distinguishes it from other kind of Receivables or Debtors and makes it unique to all of your customers in StorMan. So now you don't have to try and figure out what each payment is for. It's simple. It is a reduction in the balance owing to you by your customer.

Now... I can already hear several people asking: "How are we going to know how much rent and insurance and merchandise sales we have for the month?!". Well, that's what StorMan is great for!

StorMan (living on a computer) can easily add things up. StorMan produces the Income Charged Report (more on this report: RPTICHR01) each month which very nicely tells you the totals you have charged for Rent, Late Fees and in fact every Analysis code that StorMan has charged or billed that month. From that report you can easily update your standing (or recurring) journal in your accounting package with the totals of each revenue item, and the total of all of them goes to 'Customer Receivables'.

Fortunately StorMan has a knowledgebase article that explains how this is done very simply (see "Using StorMan for Accrual Accounting" - #ACTACCRUAL01). I urge you to have a read and if you have more questions, either show it to your accountant or if you want to figure it out yourself, one of our helpful support team members will assist you.

 

But what about tax (GST)?

For those in the background who I can hear jumping up and down because of the GST problem, can I just say this - you run a Storage Facility (or Marina / Deposit Box / Vault company), correct? Which makes collecting your receivables a whole lot easier than for some.

Next time the customer arrives to collect some of their goods, oh dear - they can't get in the gate, or perhaps the goods are gone because you've helped them out by selling them! The point being, your type of business will generally have very low receivables or even negative receivables which means that you are actually not at all out of pocket with GST.

It means you can claim GST on those hefty rates bills before you've actually paid them; a win all round! You will also make yourself even happier, should the Tax Office decide to audit you.

 

Final words...

Just to let you know that we here at StorMan Software (being big believers in our own product) actually use StorMan (the same one you use) for our billing and it makes our accounting a breeze. We follow exactly the method described above and at the linked article on "Using StorMan for Accrual Accounting" (again, see #ACTACCRUAL01) - and it takes us less than an hour a month to completely reconcile our QuickBooks with StorMan and complete all the entries necessary on the customers side... and that includes dealing with offices in multiple countries that all have different currencies and varying tax rates. Now if only paying the bills took as little time!

So please congratulate yourself on getting 100% if you answered 'D' in the StorMan accounting and reconciliation test. Here's to hoping that many more will move to the easy side when it comes to accounting with StorMan and agreeing it to your accounting program. Perhaps Accrual really does win over Cash - what I can tell you is that you will end up with more cash (as well as time!) in your pocket. Thank you for reading... :-)

- Stephen

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