Businesses in Cameroon with an annual turnover above 50,000,000F are classified under Actual Earnings Tax System. These businesses need to prepare their accounts using the standard accounting techniques. The accrual accounting system is provided by the OHADA law.
This system demands more detail, tracking not just cash flow but all income earned and expenses incurred within the year. While it’s a bit more complex, it gives a full picture of your business’s financial health.
What’s Expected in the Accrual Accounting System?
Under the accrual accounting system, you need to document both income and expenses as they are earned. You should also document them as incurred, not just when cash changes hands. This means tracking sales and expenses even if the money hasn’t been paid or received yet.
With this approach, the financial position of a business can be accurately reflected at any given time.
What to Record vs. What Not to Record
Let’s take an example of a construction business, BuildRight Ltd, which has an annual turnover of 80,000,000F.
Let’s see what to record and what not to record. They regularly take on large projects that involve down payments and staggered payments across several months. BuildRight has reached the threshold for actual earnings accounting. They need to record all earnings and expenses as they occur. This means not just when they’re paid.
Here’s what they should record:
Income as Earned
For example, BuildRight starts a project in January, with a contract to finish it by May. They have agreed to a total payment of 5,000,000F, paid in monthly installments. For accrual accounting, they record the entire monthly installment as income each month, even if the payment is delayed.
Expenses as Incurred
If BuildRight buys materials on credit, they record the full expense when the materials are delivered and used. They do not record it when they pay their supplier. So, if they get a 1,000,000F bill in January, the expense is still recorded in January. They pay it in February.
Depreciation of Assets
Accrual accounting includes the gradual loss in value of assets. If BuildRight buys a new excavator for 10,000,000F, it is expected to last five years. They record a depreciation expense of 2,000,000F each year. This shows the machine’s decreasing value over time.
Accounts Receivable and Payable
Income earned but not yet received is recorded as Accounts Receivable. For instance, if they bill a client 2,000,000F in March, it’s added to accounts receivable until the client pays. Similarly, expenses that are due but unpaid go into Accounts Payable.
Read Also: Step-by-Step Guide to Incorporating Your Business in Cameroon
Inventory
If BuildRight keeps materials on hand (cement, bricks), they record the value of inventory at the end of each year. This reflects the costs yet to be used in a project.
What You Don’t Need to Record
Immediate Cash Transactions Only
Unlike simplified accounting, they can’t only record transactions when cash is involved. BuildRight must account for income and expenses even if payments are pending.
Personal Assets or Transactions
Only assets and expenses related to the business are recorded, so the owner’s personal finances stay separate.
Sample Accrual Accounting Summary for BuildRight Ltd.
| Date | Description | Income (FCFA) | Expense (FCFA) | Account Type |
|---|---|---|---|---|
| Jan 5, 2024 | Contract Income (Installment 1) | 1,000,000 | Accounts Receivable | |
| Jan 15, 2024 | Material Purchase (on credit) | 1,000,000 | Accounts Payable | |
| Feb 1, 2024 | Excavator Depreciation | 166,667 | Depreciation Expense | |
| Mar 1, 2024 | Contract Income (Installment 2) | 1,000,000 | Accounts Receivable | |
| Mar 10, 2024 | Wages Paid | 300,000 | Cash Outflow |
With accrual accounting, you can see a clear view of a business’ financial health. It allows for transparency, better budgeting, and compliance with tax laws. Though detailed, it empowers businesses to make informed financial decisions.
This gives BuildRight Ltd. clarity in their finances, setting the stage for growth and stability. With regular updates and a structured approach, accrual accounting can keep larger businesses on track for success.
Read Also: Simplified Accounting System for Small Businesses in Cameroon
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