Hello, I just want to ask regarding the payslip and salary. If a payslip is issued November 30, 2021, and the salary is not yet paid until December 15, 2021. Based on the November 30, 2021 profit and loss report the salary is still included even though the accounting method is cash basis.
Is it correct that the salary expense must not be included in the profit and loss report dated November 30, 2021, if the accounting method is cash basis? It will be included only on the date of payment, not on the date of issuance of the payslip.
Manager is, at its core, an accrual basis system with options for cash basis reporting. But if you intend to use cash basis accounting, you need to adapt your procedures for when you record expenses.
In your example of paying an employee in April, you should not enter the payslip until April, then immediately pay the employee. You are right to guess that payroll is somewhat different. A payslip tells the program that you have incurred expenses for wages or salaries. These debit an expense account and must be matched by a credit to a liability account, Employee clearing account. But no money has moved. So there should really be no entry at all if you are not paying the employee.
Technically, a purely cash basis balance sheet would not include accounts like Accounts receivable or Employee clearing account. But many of Manager’s functions would then not work.
So in short in your case you can only issue the payslip on the date of payment when you use cash accounting.
What I want is the same on the issuance of the purchase invoice, the expense is reflected based on the accounting method (cash or accrual basis) cash basis reflected based on the date of payment, and on accrual-basis reflected based on the date of issuance of the invoice.
If the expense is incurred for example November 30, 2021, and paid on December 15, 2021.
On a cash basis reporting that expense should not be included on November 30, 2021 reporting since it is not yet paid during that time. It should be reported on December 2021 cash basis report. and if accrual method, of course, it will be recorded on the date it was incurred.
If you use cash accounting I think that you should not use invoices. Stick to receipts and payments as you can not have accounts receivable and payable (accrued expenses and payments) when using cash based accounting.
Of course you can, but why should you? Cash based accounting is meant to be simple and for small businesses who will have direct insight into their cash flow.
In Manager when you choose cash accounting basis (click edit button next to summary and change accrual to cash accounting) and enabled invoices, you will notice that the creation of an invoice with a future due date will directly clear that as income or expense as if payment or receipt has been recorded.
If choosing accrual accounting the amounts are also shown as income or expense but in balance sheet they also show as account payable or account receivable and the invoice shows it is not cleared until an actual payment or receipt is made agains it. It also requires to enter a customer or supplier otherwise he invoice will appear in the suspense account for being incomplete.
So yes you can use invoices but there is no benefit as it would record that a cash transaction has been completed so you can as well just enter a payment or receipt.
Profit and Loss Statement Report under cash basis is totally different from accrual basis accounting, per cash basis, income and expenses are recorded when it is paid not when it is incurred.
per accrual basis, income and expenses are recorded when it is incurred not on the date of payment. That is why it defeats the purpose of generating a cash basis P/L statement if one of the accounts (ie. salary) is showing even though it is not yet paid, it just shows that the Profit & Loss statement is not accurate. I will not use the purchase invoice just to get what I want, This one should be corrected.
Payslip
Salary>Cash Basis >Recorded when paid
Salary>Accrual Basis>Recorded when incurred
Yes, you rightly provide the difference between cash and accrual accounting as also explained in the posts by @Tut and in the guidelines. However, @Tut also explains (click the link) the limitations Manager has in this respect and I tried to explain how to deal with it as he did.
Lots of reasons, for example in a small business which has elected to use cash based accounting.
there is no reason they should not issue an invoice to a customer.
some suppliers issue invoices which can be paid monthly over a year. The most efficient way to enter these in Manager is to create a purchase invoice complete with allocation to multiple accounts, then enter monthly payments to this invoice. Manager then creates the appropriate entries for cash based accounting.
In summary a user should create invoices in Manager when ever it is optimal to do so irrespective of if they are reporting to the tax authority on a cash or accrual basis.
I just really hope that this will be considered, especially for us who have a client that uses both accounting methods. Thank you for your suggestions!
For wages and salaries the real question is:- using cash based accounting standard (as opposed to Managers implementation), should the the transaction be reported when it is
first entered into Manager (a payslip is created),
the payslip date passes, or
the employee is acually paid
If it is actually option three, then perhaps making Manager complient with standard accounting practice for cash based account should atleast be an idea. Correcting it would require a similar mechanism as is used elsewhere for cash based accounting (a coded correction not requiring the user does not use a major Manager feature).
Another observation on balance sheet report under cash basis and accrual basis. Under accrual basis accounting, salaries payable is recorded which is correct, however on cash basis accounting, salaries payable is still recorded which is I think is wrong,
I also included on the illustration the rental payable which is recorded on the accrual basis and not included anymore on cash basis accounting which is correct,
As you can see also, accounts receivable was not reported on cash basis accounting which is correct also.
All of you are relying on overly simplistic definitions. There is more to the distinction between cash and accrual basis accounting than when the payment or receipt occurs. The differences are obvious for sales and purchase invoices, but not so obvious for other transactions.
For cash basis accounting, expenses (such as wages) are recorded when the cash is paid out. For accrual basis accounting, expenses are recorded in the period when they match up with related revenues, occur, or expire. In the case of a payslip, the liability it creates expires when you make payment against it. So you cannot record a payslip in November, a payment in December, and switch back and forth between the two accounting approaches. If you are using cash basis accounting, you must record the payslip and the matching payment in the same accounting period.
The reason this distinction is not obvious for invoices is that payments and receipts are posted against specific invoices (or automatically allocated to them) by Manager. So changing from accrual to cash basis can simply ignore invoices. But payments are not similarly posted against specific payslips, only against individual employees, who may have expense claims, advances, or other transactions represented in their subsidiary ledgers under the Employee clearing account.
The end result is that operating under cash versus accrual basis accounting requires not just different reporting, but different recording practices.
That is a description of how to work around partly implemented cash based accounting in Manager.
It is also when Manager should report the transaction the same way it does with invoices under cash based accounting.
There is no need to enter an invoice in the same period it is paid in cash based accounting in Manager. I see no reason to have to do so for payslip other than Manager payslip reporting under cash based accounting needs improvement.
I suggest always keep your business transaction on accrual bases. Cash base accounting will not help to calculate exact profit and loss. specially in that case when salary is not paid when it is due. Accrual base accounting is the best method to calculate exact profit and loss account and position of the company. If it is possible to change cash to accrual then go head immediately.
I am not sure why you answering me as I already use for all businesses accrual accounting for reasons you have given and are well known to be preferred. However, I understand why some, if legally allowed, want the simplicity of cash based accounting with its advantage of direct cash flow monitoring that for some small businesses is far more important that accruals. The just want to know what they spent and still have in the pocket to spent while still complying with local tax authorities.
The issue for Manager is not if cash or accrual based accounting is better or worse for a particular business. That decision is made by the business owner and the requirements of a particular jurisdictions. Importantly in every jurisdiction I’m aware of, after a business owner has chosen a particular accounting standard, the business owner can’t change how expenses or income is reported without informing the tax authority (and making transition adjustments). As a result reporting some expenses using cash based accounting and some using accrual based accounting is illegal.
The issue for Manager is:- if Manager provides support for cash based accounting, does it actually comply with the accounting requirements of cash based accounting or does it make accounting errors by reporting some income or expenses in the wrong period. In my opinion, if accounting software makes accounting errors then the program has at least a design bug (even if it is behaving as designed).
@lubos - I know this is an old topic, but just had a new client asking about the reporting and why cash and accrual methods reports the same numbers…even with explanation of Manager implementation, would it be possible to remove this from the report as it is confusing clients?
