When Cash Basis Software Is All You Need: Pros and Cons

Author: Donna Vincent Solo Accounts

There are two methods of accounting commonly referred to, cash basis and accruals basis. The method you use will affect when you must report GST on a Business Activity Statement, it will determine how your income tax is calculated and could also affect your choice of bookkeeping or accounting software (and how complicated it is).

To help clarify when the simple, cash basis method is more appropriate there are four key things to consider – the size of your business, the suitability of cash versus accrual bookkeeping, your accounting knowledge and level of understanding, compliance and the level of support you need. 

In this article I cover these considerations however, I am very happy for you to call me for further information and to explain your choices of accounting software relevant for businesses like yours.

Size: How many people work in your business?

There is generally a direct correlation between business size and the accounting software you should be using. Do you need payroll? Do you have a separate accounts person or department? Do you issue purchase orders or hold inventory?

The bigger your business is will dictate the complexity needed in your software.

If you are a sole trader or a self-employed contractor then your needs will be far less complex and the requirements of your bookkeeping are much simpler and basic. A cash basis bookkeeping system, like Solo Accounts, that has been designed for micro-businesses are prefect and easy to use. These will save time and mistakes that can be made with the alternatives that are based on double entry accounting systems most common on the market. These are unnecessarily complex for simple cash-book type businesses.

Suitability: Should I use the accruals or cash method of bookkeeping?

Many business owners do not know what the different between an accruals versus a cash method of booking is. You aren’t alone. Accrual accounting means you record amounts and produce reports based on the date on an invoice or receipt, rather than the date when it is paid. Larger organisations need to use the accruals method, mainly because of the volume of entries and the time it takes to pay bills and receive money, and also because more people in the business use the data.

Cash basis accounting means you record and produce tax reports using the date when income or expenses are actually received or paid. Money In – Money Out. It’s a straight forward method and easy to understand. Most micro businesses operate and record this way without even knowing there is a name for it.  Solo Accounts was designed as simple software that supports this type of accounting, especially for small businesses, contractors and sole proprietors.

Ability: What’s your training in accounting concepts and terminology?

Double entry bookkeeping was invented 1494 and its’ basic principles have not changed since then. The only significant change is that the process is mostly done electronically now rather than in an actual book. The applications of debits, credits, assets, liabilities, equity, income, expenses, journal entries and adjustments, prepayment etc all still happen. This is how you achieve accrual based accounts.

Single entry bookkeeping on the other hand is a much simpler, watered down version and only involves the entry of income and expenses using the date they are paid. This method gives you cash based accounts. 

Most of the well-known accounting software packages are based on double entry bookkeeping and accruals-based accounting, which is exactly why I developed Solo Accounts software.  I saw that sole traders and contractors needed something that supported business owners who only need the simple cash-based accounting system.

Understanding: Is intuitive really smart or really dumb?

While modern accounting software that is based on double entry bookkeeping comes with a certain level of “intuitive” capabilities, this is a computer “guessing” how your record should be entered and then asking you to agree or disagree. Too many untrained users of these systems just say “yes” without understanding or checking whether the suggestion is correct. As a consequence, you could inadvertently have a whole bunch of wrong entries that will need to be corrected; more time, effort and money!

My golden rule is “if you don’t know how to undo what you are doing, then you need to use a system where you do”.

If you are a sole trader or small business that does not need payroll included in your accounting software Solo Accounts is the perfect option for you.

Remember, it’s better to have a simple system that is correct, than a complex one that confuses you, causing your reporting to be incorrect.

Compliance: Who are you reporting to?

I expect you have never counted the number of reports that are available in the commonly used accounting software.  Most of these are unnecessary for a sole trader, contractor or small business. Many of these reports are actually mis-used or nor understood by users.

Solo Accounts provides sole traders and business owners with the select, simplified reports they need. Included in the system is the important data that should be produced and read to help you keep control of your finances and make informed decisions.  The reports included can help you with income tax reporting, Business Activity Statements, bank loans, cash flow and government packages on offer, like the JobKeeper program.

Support: Do you have a help line that provides the assistance needed?

Running a business and doing things on your own, as a sole trader or small business owner, can be a lonely place. When it comes to bookkeeping and accounting software, it’s important to have someone you can call to get the support you need.

One of the issues with the major accounting software providers on the market was highlighted in a recent survey of BAS Agents and Bookkeepers who are professionals using accounting software every day. They claimed that while support from the software companies themselves is needed, they find the help lines are very limited and getting to talk to someone in Australia for support isn’t great. So, if the professionals need help, it’s no wonder a small business owner needs assistance too.  This is why Solo Accounts has direct access to a registered BAS agent to provide the support you need and to ensure you are able to use the software and the app without any problems. 

My dream is to ensure that all small business owners, sole traders and contractors can easily understand and be in charge of their bookkeeping so they can actively manage their finances. This knowledge impacts on day to day success and long term growth plans. It affects your ability to borrow money for the business and it will improve your relationship with financial lenders and suppliers. Understanding and keeping on top of your numbers will also reduce the stress you feel running your business, help you sleep better at night and free up your time so you are doings the things that you love.

What are you waiting for?  Sign up for a free trial of Solo Accounts software today here: https://app.soloaccounts.com.au/sign-up   and download the app to upload your receipts.

Please give me a call if you have any questions. Donna Vincent: 0427 083 737