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Accrual verses Cash Reconciliations

Now that the end of the financial year roll-over has occurred, it is time for most commercial property owners and managers to consider the issue of reconciling outgoings and determining if there are moneys to be credited to or recovered from tenants. This is particularly relevant if the property is subject to the Queensland Retail Shop Leases Act (RSLA).

First, one must determine if the accounts are to be reconciled on a Cash or Accrual accounting basis. This is often specified in the lease agreement. For clarity the two accounting methods are defined as follows:

Cash Accounting: “An accounting method where receipts are recorded during the period they are received, and the expenses recorded in the period in which they are actually paid.

Basically, when the cash is received for a sale, it is recorded in the accounting books as a sale. This is in contrast with accrual accounting, where revenue and expenses are recorded when they are incurred.”1

Accrual Accounting is less easy to define. It is “An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognised by matching revenues to expenses (the matching principal) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition.

Accrual accounting is considered to be the standard accounting practice for most companies, with the exception of very small operations. This method provides a more accurate picture of the company's current condition, but its relative complexity makes it more expensive to implement. This is the opposite of cash accounting, which recognizes transactions only when there is an exchange of cash.

For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year. Accrual accounting, however, says that the cash method isn't accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn't yet in the bank, the sale is booked to an account known in accounting lingo as "accounts receivable" and the seller's revenue has increased.”1

Generally most properties run a normal tax year from 1 July through to 30 June. This makes life simpler for reconciliation purposes and this also aligns with tax reporting functions. There are some properties that run a Calendar year as their financial year and for those properties, the principles still apply albeit offset by six months. Still for other properties that run different financial years, the principles still apply.

The RSLA does not specify when the financial year of the property must run. Rather it specifies that the accounts must be treated on an accrual basis. For an example, electricity charges that often run across financial years have to be apportioned on a cost per day basis and for the number of days relating to the financial year. The accounts then have to be summarised and audited by an accountant, as prescribed by the Act. Upon completion, the Landlord or its nominated manager must raise either credits or charges and issue these to the tenants within three months of the end of the financial year.

For commercial properties, the reconciliation is lease dependant. One tenant properties or properties of a smaller nature are generally charged in arrears on a cash flow basis. That is, there is no reconciliation required as they ‘pay as they go’.

Some commercial properties only require that the accounts be reconciled. It is our suggestion to Landlords that this be undertaken on an accruals basis as this is often not significantly more time consuming but it gives great clarity to applying charges. This is particularly relevant when there are tenants entering and exiting the property part way through the financial year.

At Raine & Horne Commercial, we have the computer systems and resources to complete these reconciliations and reports. Furthermore, we have associations with qualified accountants who can undertake the audits on a cost effective basis to comply with the leases and the Act.

For further information in relation to the process and cost benefits, please do not hesitate to contact Daryl Gallagher-Collins, Manager of the Asset Management Division.

INDUSTRIAL & COMMERCIAL REAL ESTATE BRISBANE QUEENSLAND AUSTRALIA

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Accrual verses Cash Reconciliations