Accruals or Cash Accounting?

Accruals accounting and cash accounting are two methods of tracking income and expenditure in accounts.  Cash accounting recognises transactions only when there is an exchange of cash, therefore income is recorded only when cash is received, and expenditure is recorded only when cash is paid.

Accruals accounting records income when it is earned and records expenditure when it is incurred.

The principle is to measure the performance and position of a company at any point in time, by recognising economic events regardless of when cash transactions occur.

Productions generally use a variation between the two methods.  Petty cash expenses and income are usually recorded on a cash accounting basis and expenditure is usually recorded when it is committed, e.g. by recording a purchase order when it is written.  This method provides an accurate picture of the production’s current position against their budget at any point in time.

However, it is important to recognise that recording expenditure when it is committed is different to recording it when it is incurred.

For example, in January a purchase order is raised for the hire of a crane in February, and it will be paid on 30 day terms in March.

A production accountant should record the expenditure in January when the amount is committed.

Accruals accounting requires the amount to be recorded in February when the crane is used, and therefore the expenditure is incurred.

Cash accounting will record the amount in March when it is paid.

Accruals accounting is the standard accounting practice for UK companies, with the possible exception of very small operations.  The accountants for the production company may therefore require an adjustment to the accruals when preparing the year end accounts for the company.

Production accounting best practice is to record any income or expenditure as soon as it is committed.  In essence what this system requires to work effectively is for purchase invoices to be processed in a systematic and efficient manner.  All purchase orders should be put on the system when they are written.  In addition all purchase invoices should also be put on the system and then matched and checked to the purchase order with any queries or disputes made after that point. A later credit note is then the proper way of reducing the total where there are discrepancies.

Likewise, all sales invoices raised should be processed on the accounting system swiftly. These invoices should also be processed through the accounts receivable module of the accounts package (if available) so that the age of these debtors can be properly checked and chased. A common error made by some Production Accountants is to wait until the money has been received before processing the invoice. This is done in order to minimise any VAT repayment that may be due but is incorrect and could lead to a penalty.