Question

Your client is a sole trader consulting business operated by the owner with five part-time employees, three being employed in the past year due to growth of the business and your client is seeking to employ a further two full time employees to satisfy contracts for which deposits have been received, in place for the next financial year. From the time the business was established, 1 July 2015, it has been accounting for tax purposes on a cash basis. For the current financial year your client is considering if they should account on an accruals basis as the size of the business is increasing. In considering the options the client notes that as at 30 June it has $40,000, which was paid to it from consulting work that was undertaken in the previous financial year.

a.Calculate Jamee’s assessable income for the current year ended 30 June 2020.

b.Should this amount be included in its assessable income for this year or last year if they decide to go ahead and report on an accruals basis?

c.Would your answer be different if your client had deliberately told the customer not to pay its account for $40,000 until after 30 June?

Answer 1

Step 1

Accounting as per cash basis: Under this system revenue is recognized when money is received and expense is recognized when cash is paid irrespective of their accruals.

Accrual basis of accounting: Under this system expenses and revenue are recognized when they accrue to the business, irrespective of cash received or paid.

Step 2

a. The assessable income of Jamee for the current year ended 30 June 2020 shall include $40,000 though it pertains to consulting work undertaken in the previous financial year, since the accounting for tax purposes is done on a cash basis, $40,000 would be considered in the assessable income of the current year.

b. If they report as per the accrual method of accounting then the amount of $40,000 shall be reported as income of the previous financial year since, as per accrual basis the income shall be assessable as and when accrued irrespective of cash received or not. In the given case income of $40,000 has accrued in the previous financial year since, the consulting work was undertaken in the previous financial year, and hence, income shall be assessable in the previous financial year as per the accrual method of accounting

c. Since accounting is done as per the accrual method, receipt of cash would not make any difference because the income would be recorded as soon as it accrues even though cash is received at a later date. Hence, the answer would not be different if the client had deliberately told the customer not to pay its account for $40,000 until after 30 June. However, if the company follows the cash system the answer would differ, if the client had deliberately told the customer not to pay its account for $40,000 until after 30 June, because in that case $40,000 would be recorded as income only on a receipt basis.

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