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Making sense of GST accounting

Making sense of GST accounting

As a small business owner, accounting is probably one of your least favourite activities. However, having good accounting practices can be key to a successful business. We break down two accounting methods for GST for your business.

 

GST on a cash basis

If you use this accounting method, you account for GST in the period you were paid for an invoice. For example, if you issued an invoice to a customer in January but weren’t paid until February, you account for the GST in February. This means you do not pay GST until your customers have paid it. Businesses must have a tax invoice to claim a GST credit and have up to four years to make GST claims.

The Australian Taxation Office (ATO) says this method helps you better manage cash flow because both liabilities and income are matched.

Small businesses that have less than $2 million in turnover can use this accounting method for GST. You can also use this method if your business accounts for income tax on a cash basis.

GST on a non-cash (accruals) basis

Accounting for GST on a non-cash (accruals) basis means you account for GST in the period in which you issued or received an invoice or when payment was received – whichever happens first. This means you may be required to account for and pay GST even if your customer has not paid it yet. In other words, you ‘accrue’ the GST on a rolling basis, irrespective of payments.

For example, if you sent an invoice to a customer in January but weren’t paid until February, you still account for it in the January reporting period. However, if you were paid before you could issue an invoice, you account for the GST when it was paid because it happened first. While many large businesses calculate GST on a non-cash basis, small business can also use this method.

The ATO says it is better to claim GST credits in the reporting period when you send an invoice or make a payment. However, you won’t be obliged to do this and you have up to four years to claim credits.

Which accounting method you use for GST can have a significant impact on your business. However, any accounting changes should be carefully considered in conjunction with financial advice from an accredited accountant or financial planner.

Adding GST to the mix can complicate things for your business. Learn how to figure out if your business needs to register for GST in the first place.

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