If your business is registered for GST you should be aware of the reporting requirements you have. Most businesses will need to report the GST they collected each quarter in a business activity statement (BAS). Where things can get confusing for some business owners is in the different reporting methods you can use.
Often, business owners will be shocked to find their BAS amount payable is different from what they were expecting for that quarter (or what was appearing on the balance sheet). The reason this happens is generally because the business is reporting GST on a cash basis and the balance sheet is usually on an accruals basis by default.
Depending on your business, your Accountant may have elected for you to use cash-based GST reporting as it can be beneficial to a lot of businesses. But what is the difference between cash and accruals reporting, and why is cash the go to?
What is the difference between cash and accruals?
The difference between cash and accruals often comes down to when the GST is reported. The way you calculate GST does not change, its only when the GST is actually reported (and paid/refunded) that changes.
If you report on an accrual basis, you are reporting the transaction by the date it took place. This could be the date of the sales invoice or date of a purchase invoice. This is even if the payment doesn’t actually take place until days, weeks, or months afterward.
On the other hand, reporting on a cash basis involves reporting transactions on the dates that you received the cash for the sale or the day the cash was sent for purchases. It is possible for a sale to happen in one quarter and for the payment for the sale to arrive in the next quarter. This means, under the cash reporting method you would report less GST than your sales reflect, which leads to you paying less GST in one quarter and more in another.
What are the benefits of accruals?
Your business could be required to pay for goods upfront, however, you offer extended payment terms to your clients. In this case, you may wish to receive a refund from the ATO on the GST you have spent through your business’ purchases. You can use the accrual method in this situation.
This method is generally used by larger enterprises in order to simplify their accounting processes. Meanwhile, smaller businesses may find that this method could have a negative impact on their cashflow. Talk to your accountant as to whether this method is right for you.
What are the benefits of cash?
Cash reporting is the most common for businesses. In this case, you simply report the GST you have collected when you receive the cash. For small businesses, this method is simpler and easier. Often the cash reporting method is also better from a cashflow perspective, ensuring that you are paying the GST you physically have in your accounts.
Before you decide which method you would like to use for your business, you should talk to your accountant. They will likely know what method is best for your business based on its size and industry. For most businesses, the common reporting method to use will be the cash method.