CASH AND ACCRUAL METHOD OF ACCOUNTING IN PIT

If you keep a revenue and expense ledger (KPIR), the important issue is to recognise the moment of incurring cost, that is, the moment of recording it in PKPiR.

The date of incurring tax deductible costs, in principle, is the date of issue of invoice or other evidence that provides the basis for the recognition of cost in PKPiR.  However, this rule does not always refer to costs relating to the periods at the turn of the year.  E.g. invoice issued in 2016 but documenting deductible cost which entrepreneur is expected to reach 2017, or an invoice issued in 2016 and relating to services to be fulfilled in 2017.

You have the choice of two methods of recording costs:

  • accrual method
  • simplified method (cash accouting).

Remember! Do not confuse these methods of recording costs with cash accounting of VAT.

You do not have to report the choice of method of KPIR to the head of tax office and to show it in the entry in the CEIDG.  It is an internal, adopted by you method of cost recording.  You need to be aware, however, that the method chosen must be used for the entire tax year.

Accrual method

In case of accrual method you need to divide costs into directly and indirectly related to revenue gained in a given tax year.

Indirect costs are those that cannot be clearly attributed to a particular revenue.  For example, advertising expenses, telephone subscription, rent, office equipment insurance etc.

Direct costs are those that are directly attributable to invoices you issue to your customers.  This is the purchase of certain goods which then you sell, purchase of services necessary to fulfil a contract (e.g. an insurance of particular transaction, legal assistance in drawing up a specific contract, remuneration connected  with service provided by your company).

In the case of direct costs, they are included in the year in which the corresponding revenues were achieved -  but only to the day of the submission of the tax return in respect of the year in question, but not later than by the expiry of the period laid down for the submission of this return, where there is no obligation to draw up financial statement.  On the other hand, if they were incurred after the date of submission of the tax return for the year in question, and concern the revenue shown in this return, they should be shown in the year they were incurred, i.e. during the next tax year.

For example, if you bought a machine in November 2014 with deferred payment (payment in January 2015) and you sold the machine to a customer in December 2014, then the purchase cost, although incurred in January 2015, must be recorded  in revenue and expense ledger for the year 2014 (dated 31 December).

If, however, you submit a tax return (the time limit for lodging a tax return expired) prior to the date of issuance of invoice related to the income achieved in the previous year, you register the cost in the year of purchase.

In the case of indirect costs - you record them on the date of issuance of the invoice by your supplier.  There is only one exception to the recognition of indirect costs in this way.  If the cost relates to the turn of the year  - it is divided proportionally to the tax year to which it relates.

For example, if you pay for a permanent service (e.g. rent, leasing, phone bill), but for periods other than monthly (from the 1st to the last day of the month), at the turn of December and January proportionately divide the cost resulting from the invoice, despite the fact that it was issued in January.  

An example is the invoice for the insurance policy of office equipment, covering the period between 1 February 2017 to 31 January 2018. in this case, 11/12 of the amount of that invoice will be included in the cost for 2017 (as it relates to 11 months of 2017) and 1/12 of the amount of that invoice will be included in the cost for 2018 (as it relates to 1 month of 2018).

Sometimes it will not be necessary to divide invoice proportionally since the division of its amount into months will result from the invoice. An example is the phone bill, which consists of the settlement  of phone calls for the previous month and subscription fee for the current month.   The part of the amount of an invoice relating to a telephone service (subscription) for the month of January should be recognised as January costs and part (telephone calls) as costs for December of the previous year.  

Remember!  Cost-sharing principle described above in respect of periods relates only to a turn of the year rather than, for instance, months falling during the year. This means that the invoice issued in May, relating to services provided in April should be accounted for in accordance with general rule - with its date of issuance.

This can be done more simply - cash accounting method

The cash accounting scheme (also referred to as simplified) lies in the fact that the tax deductible costs shall be recognised as an expense on the KPiR on the day they were incurred, thus only in the year in which they were incurred, regardless of whether they relate to the current or the following year.  There is therefore no need to divide the costs into direct and indirect, and allocate incurred costs to specific revenues.

 

Comparison of cash and accrual accounting in recording direct costs 

Jan Kowalski performed, from 1 December 2016 to 29 April 2017, the renovation works in the building in England at the request of the investor.  In order to implement the order he incurred the costs connected with journey to England - air ticket, for the purchase of which the invoice was issued dated 28 November 2016. Invoice by Mr Jan Kowalski was issued on 31 January 2017.  Revenue will therefore be achieved in 2017. 
 
Jan Kowalski records costs in PKPiR by cash method.  In November 2016 he recorded in PKPiR invoice for the purchase of airline tickets which was included in the tax assessment for 2016, 
 
Jan Kowalski records costs in PKPiR in accrual accounting.  Invoice for the purchase of airline tickets will reflect in PKPiR in January 2017, as in January 2017 the corresponding revenue was gained.  Consequently, it will be reflected in the tax settlement for 2017.

 

Comparison between cash and accruals accounting of indirect costs 


Mr Nowak  records costs in PKPiR in cash method.  On 1 February he took out an insurance policy of office equipment for the period from 1 February 2017 to 31 January 2018 for the amount of PLN 1000.  In February 2017 he will record in PKiPR  the entire amount of paid  policy.  
 
Jan Kowalski records costs in PKPiR in accrual accounting method.  On 1 February he took out an insurance policy of office equipment for the period from 1 February 2017 to 31 January 2018 for an amount of 1000 PLN. He will record the costs of policy according to the following proportion:  
 
- in 2017 the costs include:  11/12 x PLN 1000 = PLN 916,67 
 
- in 2018 the cost include:  1/12 x PLN 1000 = PLN 83,33 
 
Allocation of the costs can be made on the basis of internal proof, remembering to keep the accounting policy and proof of payment in the records.

 

Exceptions

There are economic events which specific provisions would  treat differently. The exceptions are the payment of remuneration for work and the payment of social and health contributions.  Irrespective of the cost accounting method, this expenditure shall be recorded for the month for which remuneration is due, provided that they were paid within the deadline laid down in the labour law, an employment contract or other legal relationship between the parties.

For example, if the remuneration for employees is paid for March until 10 April (as it is apparent from the employment contracts with employees) such expenditure is always for you  the expense of March.

There is an exception to this rule.  If you are late with the payment of remuneration - you record expenditure during the month of actual payment.

For example, if remuneration had to be paid for March to 10 April, but the employee received it on 12 April, such cost is recognized in April.  If the date of payment for March is the last day of the given month in respect of which remuneration is due (the last day of March) and that remuneration is paid on 1 April, then such expenditure is recognised as an expense in April

Social contributions in respect of remuneration paid may be classified as tax-deductible costs within the month in which remuneration relating to these contributions shall be due, provided that these contributions will be paid when due in accordance with relevant legislation i.e. up to the 15th day of the month following the payment of salaries and, where the remuneration for that month in accordance with the employment contract are paid or placed at the disposal of the next month, not later than by 15 day of that month.

If these deadlines are not met, these contributions will only be deemed to constitute tax-deductible costs at the time of actual payment.

Remember that ZUS contributions paid for your own social security insurance will be expense only at the time of actual payment. .

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