There are two types of accounting: commitment accounting and cash accounting. In this article, we'll focus on cash accounting, which involves keeping accounts based on the recording of bank movements.
We'll explore in detail what it's based on, how to set it up, and its advantages and disadvantages. Find out all you need to know here.
Cash accounting explained
Cash accounting is a somewhat simplified method of accounting that involves entering only cash receipts and disbursements from bank statements.
Throughout the financial year, entries in the bank journal(account 512) will be as follows:
- Cash receipts, recorded on the debit side, include amounts credited to your account statement, such as cheque remittances and transfers received. They are also recorded in the Class 7 account, which groups income accounts.
- Disbursements, recorded on the credit side, include amounts debited from your account statement, such as checks written and transfers made. They are then entered in a class 6 account if they are expenses, or in a class 2 account if they are fixed assets.
Income and expenditure are first recorded in the financial account, then broken down into the various expense and income accounts. By calculating the balance between income and expenditure on a monthly basis, you can obtain an overview of your association's overall financial situation.
Let's explore the difference between cash accounting and commitment accounting.
An overview of commitment accounting
Accrual accounting is another method that involves entering accounting entries based on invoices issued and received, in addition to bank statements.
The main difference lies in the fact that, in accrual accounting, unpaid or uncollected invoices are clearly recorded. Receivables and payables are visible throughout the year.
It is essential to switch from cash accounting to accrual accounting at the end of each financial year. This transition enables receivables and payables for the following year to be taken into account. These transactions are not reflected in the bank statement.
How do you keep cash accounts?
Here are a few accounting principles to apply if you keep cash accounts:
- Sort your bank statements in chronological order;
- Enter the transactions, also in chronological order, line by line, respecting the dates shown on the bank statement;
- Number supporting documents to facilitate filing and retrieval,
- Keep all supporting documents: invoices, receipts, till receipts, payment schedules... as proof of the transactions entered.
The bank journal will enable you to draw up a summary table of income and expenditure at the end of the year. At the beginning of the year, bank and cash account balances are taken.
Don't forget that there is normally a discrepancy between the true book balance and the bank statement balance, as payments issued or received but not yet cashed do not appear on the bank statement.
The benefits of cash accounting
The main advantage of cash accounting is that bookkeeping is simplified by the use of a single bank journal. What's more, the bank balance is constantly checked throughout the entry process.
It goes without saying that by adopting this method, you'll save a considerable amount of time in managing your association.
Its drawbacks
As mentioned above, this method doesn't allow you to keep a close eye on unpaid supplier invoices, which can lead to late payment penalties. Nor does it monitor unpaid contributions, for example.
What's more, switching to accrual accounting at the end of the year can be tedious, especially if you have a large number of invoices to settle.
Who is it for?
In principle, most associations choose cash accounting, at least initially, for its simplicity, but it is not always appropriate.
Depending on the size of the association, the volume of its income/expenses, the number of profit-making activities, the amount of subsidies received or to be received, the size of its budget and its objectives in terms of development, it is often preferable to keep more complete and precise accrual accounts.