The basis of accounting determines when transactions are recorded. The two main bases are accrual (when earned/incurred) and cash (when cash changes hands).
The basis of accounting is a fundamental choice that affects how every transaction is recorded and reported. Under the accrual basis, revenue is recorded when earned and expenses when incurred, regardless of cash movements. Under the cash basis, transactions are only recorded when cash is received or paid. Most accounting standards require the accrual basis for financial reporting, as it provides a more accurate picture of financial performance by matching revenue with the expenses incurred to generate it. However, many small businesses use cash-basis for tax reporting where permitted, as it can be simpler and may provide tax timing advantages. Some jurisdictions allow a modified cash basis that combines elements of both. The choice of basis affects your profit figures, balance sheet values and tax position. SortBooks supports both accrual and cash-basis reporting in Xero, allowing you to view your financial data from either perspective depending on your needs.
SortBooks helps with the bookkeeping behind basis of accounting by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing basis of accounting by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash changes hands. It provides a more accurate picture of your financial position than cash accounting.
Cash accounting records revenue when cash is received and expenses when cash is paid, regardless of when the goods or services were delivered or received.
Revenue recognition determines when and how revenue is recorded in your financial statements. Under accrual accounting, revenue is recognised when earned, not necessarily when cash is received.
The matching principle requires expenses to be recorded in the same period as the revenue they helped generate, ensuring accurate profit measurement for each period.
Financial statements are formal reports that summarise your business's financial position and performance. The three core statements are the profit and loss, balance sheet and cash flow statement.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.