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Accrual or cash basis

Have a student question:

Molly is a sole owner of a Melbourne based Accounting Firm. She has three managers, two directors and nine senior staff working for her. Working for the nine seniors are twenty accountants, seven of whom are graduates. On Fridays of each week, a further four students from the Royal Brisbane University come in to do a days work as part of their undergraduate training. Molly trusts her managers, and these days, rarely checks their work. Molly also has her own client base and is busy with them.

What is the appropriate basis for Molly to return her income? Cash or accruals?

I say accruals as she is not dependant on her own personal exertion to earn an income. Also, the size of her firm would have substantial expenditure costs, which would warrant accrual based accounting.

Thoughts anyone?

Reply to
GO
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I don't believe her "personal exertion" has anything to do with whether she use cash or accrual based accounting.

Using accrual based accounting is a method of matching revenues to expenses. I assume the question of the extra people on Fridays is meant to say there is more of an expense on Fridays because of it yet they are earning more revenue at the same time? Basically, one would seldom be so nit-picky as to match revenues and expenses per DAY. It is usually by period which can be a month or more.

It is quite likely that Molly will use accrual based accounting for the business in order to show revenues and expenses best paired for creditors, etc...; however, dependent upon the income tax structure, may be required to pay taxes as if it were cash based because she is a sole proprietor. Beverly

Reply to
Beverly

Does she qualify for STS ?

Reply to
New Cassandra

The question doesn't state revenue, so can't tell...

Reliance of personal exertion is a factor in considering if she should be on cash or accrual. Australia Tax case law has cased about it...

I would say that the over heads and size of the firm would justify the use of accruals...

New Cassandra wrote:

Reply to
GO

This sounds like an assignment question.

As she has a high ratio of fee generating staff, I would expect the ATO would think accruals is the correct method.

However also mention the STS, as it is clearly to the taxpayers benefit to declare income on a cash basis, as long as her turnover is under $1 million.

Reply to
New Cassandra

All the income would belong to Molly for the company - a very unusual stucture for an accounting firm. Are you asking if the expenses for her jobs should be capitalized or expensed? They cannot be capitalized but she should have some accruals. Office equip for example would be expensed if not leased and therefore... her income would be EBIT.

Reply to
Brian

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