Cash-based accounting

[Maf. King]

On Wednesday 13 Aug 2008, Doug Laidlaw wrote:
> Sorry to ask a very general accounting question.  Perhaps somebody can
> point me to a good resource?
>
> I am a retired Solicitor.  In about 1970, our Courts ruled, in a case
> involving accountants, that accountants and solicitors in Australia must
> use revenue-based accounting  for income tax purposes.  (Barristers are
> still allowed to be cash-based.)  At that time I was working for a sole
> practitioner who had been using cash-based accounting.  He had to convert.
> In practice, revenue-based accounting is all that I have known.
>
> My daughter helped my wife set up a Windows program for her to keep the
> home books on, a system very like an electronic cash journal.  My daughter,
> who has a Bachelor of Business degree, claims that on a cash receipts basis
> nothing is entered in the books until the monthly bank statement comes in -
> _then_ we chase back through the cheque book to find what a particular
> debit was for, and only enter what is on the statement.  That makes a Bank
> reconciliation totally unnecessary, except as a test for completeness.  It
> sounds a stupid method to me, and conflicts with the manual, but I can't
> argue with a B.Bus., especially my own daughter.  Her husband is a
> tradesman, and I believe that under the above Court decision, he is still
> entitled to keep his books and lodge his return on a cash basis.
>
> I would enter each transaction as it occurred and reconcile it à la Quicken
> or Gnucash.  At a later date, we may wish to derive tax figures from the
> data, but it is only wages and investments.  The tax difference is
> irrelevant.
>
> Which one of us doesn't know what he/she is talking about?
>
> TIA,
>
> Doug.
>

Hi Doug,

IANAA, nor do I know aussie rules, but I would say that your way is correct, 
at least in the UK.

For cash based accounting, IMHO, the important date is when transaction 
happens from *your point of view* (ie you write the cheque to pay the 'leccy 
bill/receive your wage slip).  Not the date on the bill when it was raised 
(revenue or accrual basis), nor the method your daughter seems to propose, 
which I presume uses the "cleared from bank" date (although I can see her 
logic).

I think that one of the reasons to reconcile is to ensure that the bank 
haven't messed up a transaction (as recently brought up on  the list), or 
that the cheque hasn't got lost in the post and you are about to have 
the 'leccy supply cut off.... An advantage that is lost in your daughter's 
approach.

HTH,
Maf.