always use the invoice date. This is known as the 'accruals' basis of accounting.
By operating an accruals basis all financial documents are recorded according to the tax point date. If all financial transactions during the year were paid for in that year then the cash basis and accruals basis would produce identical results.
The main adjustment a small business or the accountant might make to accounts prepared on the accruals basis is to first prepare the set of accounts according to the tax point of the primary accounting records and then examine those transactions and adjust them according to their relevance to the financial period for which the accounts are being prepared.
A typical example of the difference would be the rent invoice for the business premises. Let us assume a quarterly rent invoice was received dated 1 December for the 3 months from December 1 to February 28 which was paid by the small business owner by cheque on December 31 and a year end date also of December 31
On a cash basis the rent would not technically be included in the accounts as it would be shown as a rent payment from the business bank account on January 2 or later if cashed by the recipient at a later date. Therefore that quarters rent would be included in the following year accounts not the current year as issuing a cheque is not a payment but actually a promise to pay.
If the rent was paid in cash prior to the 31 December then the whole 3 months rent would be included in the current accounting records. That treatment may have distorted the accounts as more or less than 12 months rent might have been included in the tax calculations.
On an accruals basis the rent invoice would have been entered in the accounting records with an effective date of December 1. Using accrual accounting the accountant or small business owner preparing the accounts would then deduct 2 months rent as a prepayment leaving one months rent in the current year accounts.
That is more accurate as the other side of the accounting would be for that same accountant or bookkeeper to further include the 2 months rent not already claimed to be included in the tax calculation for the next financial year. That is how prepayments are treated when a business uses the accruals accounting basis.
Further when using the cash accounting basis only those transactions paid for or received are included. On an accruals basis additional expenses can be added that may not have even been invoiced yet on the basis that the costs incurred were relevant to the accounting period for which the books are being prepared.
Cash accounting might appear easier but has the disadvantage of maintaining receipts and payments records in addition to the primary documents which should also be matched to the financial transactions to support the accounts.
Accrual accounting is based upon recording all financial transactions and then adjusting the end result to determine the most accurate net taxable profit. The accruals basis is favoured by accountants as it reaches an accurate tax liability as opposed to more or less tax being payable on the cash basis according to the credit control policies and practises of the business its suppliers and clients.