Article highlights
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- Cash accounting is simpler and gives you a clearer view of the money actually moving through your business
- Accrual accounting gives you a broader view of profitability, money owed and overall financial performance
- The best method depends on your business size, reporting needs, cash flow and how you manage GST and financial records
If you run a business, the way you record income and expenses matters. Cash vs accrual accounting affects when transactions appear in your records, which can change how you view your cash flow, profit and overall financial position.
Cash and accrual accounting are the two primary methods businesses use to record financial transactions, but they provide different views of your business finances.
So, which accounting method is right for your business? At Advanced Bookkeeping and BAS, we help Australian business owners make sense of their numbers. In this guide, we cover how each method works, the differences between them, the pros and cons, and what to consider when choosing between the two.
What is cash accounting?
Cash accounting, also known as cash basis accounting or the cash method, records income when you receive the money and expenses when you pay them.
It focuses on the cash actually moving in and out of your business, making it easier to compare your records with your bank accounts and understand the money you currently have available.
Because of this, cash accounting is generally straightforward to manage and can make it easier to keep track of your cash flow. This is one reason it is commonly used by smaller businesses with simpler financial transactions.
What is accrual accounting?
Accrual accounting, also known as accrual basis accounting or the accrual method, records income when it is earned and expenses when they are incurred, regardless of when payment is received or made.
It also tracks money that customers still owe you through accounts receivable, as well as bills your business still needs to pay through accounts payable.
This gives you a more complete view of your financial position and overall business performance, rather than focusing only on the cash currently in your bank account. It can be especially useful for growing businesses that manage more invoices, supplier bills, inventory and ongoing expenses through their bookkeeping.
Cash vs accrual accounting: what’s the difference?
The main difference between cash and accrual accounting is timing. Here’s how the two accounting methods compare side by side:
| Factor | Cash accounting | Accrual accounting |
|---|---|---|
| Income is recorded | When payment is received | When income is earned |
| Expenses are recorded | When they are paid | When the expense is incurred |
| Accounts receivable | Not included as income until payment is received | Recorded when customers owe you money |
| Accounts payable | Not included as an expense until payment is made | Recorded when you owe suppliers money |
| Best view of | Current cash flow and bank activity | Overall financial performance and financial position |
| Complexity | Simpler to manage | Requires more detailed record-keeping |
A simple cash vs accrual accounting example
Say your business completes a $2,000 job in June and the customer pays the invoice in July.
Under cash accounting, the $2,000 is recorded in July when the payment is received. Under accrual accounting, the income is recorded in June when the job is completed and the money is earned.
The business still receives the same $2,000 either way. The difference is simply when that income appears in your accounting records.
Cash vs accrual accounting for GST in Australia
If your business is registered for GST, the accounting method you use affects when GST is reported on your Business Activity Statement (BAS).
- Cash basis: You generally report GST on sales when you receive payment and claim GST credits on purchases when you pay for them.
- Non-cash or accrual basis: You generally report GST on sales and claim GST credits in the earlier reporting period when payment is received or made, or an invoice is issued or received.
- Eligibility: Businesses with an aggregated turnover of less than $10 million can generally choose to account for GST on a cash basis.
- Different methods can apply: The method you use for GST does not necessarily have to be the same method you use for income tax or your general accounting records.
If you’re unsure which method applies to your business, a registered BAS agent can help you understand your GST reporting obligations and keep your BAS accurate.
Pros and cons of cash vs accrual accounting
Both methods have their strengths. The better fit depends on how your business operates, how complex your finances are and what you need from your reports.
Cash accounting
Pros
- Simpler to understand and manage
- Shows the cash you actually have available
- Makes day-to-day cash flow easier to follow
- Often suits smaller businesses with straightforward transactions
Cons
- Does not show unpaid customer invoices as income
- Does not show unpaid supplier bills as expenses
- Can give a less complete picture of business performance
- Profit can appear higher or lower depending on when payments are received
Accrual accounting
Pros
- Gives a more complete view of income, expenses and financial performance
- Tracks accounts receivable and accounts payable
- Makes it easier to compare revenue and expenses from the same period
- Can be more useful as a business grows or manages more complex transactions
Cons
- Requires more detailed record keeping
- Can be harder to understand at a glance
- Reported profit does not always reflect the cash currently available in your bank account
Which accounting method is right for your business?
The right accounting method depends on how your business operates, how much financial detail you need and how complex your transactions are.
| Consideration | Cash accounting may suit you if… | Accrual accounting may suit you if… |
|---|---|---|
| Business size | You run a smaller business with straightforward finances | Your business is growing or has more complex finances |
| Customer payments | Most customers pay you quickly | You regularly invoice customers on credit terms |
| Supplier bills | You have relatively few unpaid bills | You regularly have accounts payable to manage |
| Inventory | You hold little or no inventory | Inventory is a significant part of your business |
| Cash flow | You mainly want to see the cash currently available | You need a broader view of income, expenses and future payments |
| Financial reporting | Simple reporting is enough | You need more detailed financial statements and performance reporting |
| Growth or finance | Your financial needs are relatively simple | You are planning for growth or seeking finance |
There is no one-size-fits-all answer. Think about how your business operates now, the level of financial detail you need and where your business is heading when deciding which method suits you.
Whichever method suits your business, the right accounting software can make it easier to keep accurate records, track invoices and manage financial reporting as you grow. Our Xero bookkeeping services can help you keep everything organised and make sure your records are set up correctly.
Need help keeping your books on track?
No matter which accounting method your business uses, staying on top of your bookkeeping makes your finances easier to manage.
At Advanced Bookkeeping and BAS, we help Australian businesses keep their records accurate, understand their numbers and stay on top of day-to-day bookkeeping. Our bookkeeping packages can be tailored to suit the way your business operates and the level of support you need.
Not sure where to start? Get in touch with our team and we’ll help you get your bookkeeping organised.
Questions Meet Answers
Does cash or accrual accounting affect taxable income?
It can affect when business income is recognised for tax purposes, which can influence the taxable income reported in a particular financial year. The accounting method used for income tax does not always have to match the method used for GST or everyday bookkeeping, so it’s important to use the method that is appropriate for your business.
What are prepaid expenses in accrual accounting?
Prepaid expenses are costs your business pays in advance for something it will use later, such as insurance or a subscription. Under accrual accounting, the expense is generally recognised over the period it relates to rather than being recorded entirely when payment is made.
This follows the matching principle, which aims to record related income and expenses in the same period.
Can you change from cash accounting to accrual accounting?
Yes. A business might move from the cash basis to an accrual system as it grows, takes on more credit terms or needs more detailed financial reporting.
For income tax purposes, however, the method you use needs to be appropriate for your business circumstances. Changing methods can also affect your bookkeeping and tax preparation, so it’s worth getting advice before making the switch.
Do Australian Accounting Standards use cash or accrual accounting?
Financial statements prepared under Australian Accounting Standards use the accrual basis of accounting, except for cash flow information. This means income, expenses, assets and liabilities are recognised when the relevant accounting requirements are met, rather than simply when cash is received or paid.
This can help financial statements such as the income statement and balance sheet provide a more complete picture of financial performance and financial position.
For many small businesses, however, the method used for everyday records, tax purposes or GST will depend on the circumstances of the business.
