Accruals method, used in small businesses?

S

sheldon

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I undestand that a proper P&L and Balance sheet should be prepared under the accruals (matching) concept, where invoice date is key as opposed to payment or receipt date (which is cashflow).

However in my experience the majority of sole traders and micro businesses record (if at all!) their transactions on payment or receipt and therefore by those dates. Do accountants, when preparing the end of year accounts use those "cash" dates for the P&L or do they endevour to use the invoice and bill dates. In other words if a business had invoiced €20k worth of sales but only been paid €5k in the accountng period - on which figure (net of expenses of course) would they pay income tax? Thanks.
 
Sheldon, using your particular example if €20k worth of sales were recorded and €5k actual cash received then accruals dictates that you would have sales of €20k in the P&L and a Balance Sheet showing €15k in debtors. Continuing this (perhaps extreme) example of €20k in sales but 3/4 still outstanding at year end - if only the cash received were recorded think of the costs of producing the sales. If you record all of the costs but only record the cash received as sales then there would be a serious mismatch betwen costs and revenue in the accounts,hence the reason for the accruals concept. There are cases, say where all sales are cash ( cash here meaning cash or cheque or other payment as opposed to credit sales) or paid very quickly and where expenses are similarly cash or paid very quickly where the accruals and cash basis may give same result. Revenue have guidance on the circumstances where the cash basis may be used by certain traders but for the most part you will find accountants using accruals basis as that is one of the fundamental accounting concepts.
 
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