If you run a small business in Australia, you have probably heard your bookkeeper or accountant mention “cash basis” or “accrual basis” at some point. Maybe it came up when you were setting up Xero or MYOB. Maybe it came up at tax time. Either way, it is one of those terms that gets thrown around a lot but rarely gets explained in plain English.
This choice affects more than just your paperwork. It changes how your profit looks on paper, when you pay GST, and how easily you can plan ahead. Below we go through what each method means, how the Australian Taxation Office treats them, and how to work out which one fits your business better. No jargon, just the basics you need.
What Is Cash Accounting?
Cash accounting is the simpler of the two methods, and it is probably closer to how you naturally think about money. Under this method, you record income when the cash lands in your bank account, not when you send the invoice. Same goes for expenses. If you get a bill in March but do not pay it until April, that expense counts in April.
This approach gives you a pretty honest read of what is happening in your bank account right now. A lot of sole traders, tradies, and small service businesses use it because it is easy to manage without a full time bookkeeper. If your business gets paid on the spot, like a cafe or a hairdresser, cash accounting usually makes sense because there is barely any gap between the sale and the payment anyway.
What Is Accrual Accounting?
Accrual accounting works differently. Instead of waiting for money to move, you record income as soon as you earn it, and expenses as soon as you incur them, even if the cash has not changed hands yet. So if you invoice a client in June for a job you finished in June, that income belongs to June, even if they do not pay you until August.
This method gives you a fuller sense of how your business is performing, because it matches revenue to the period you earned it in, not the period you happened to get paid. Businesses that invoice on 30 or 60 day terms, or that carry stock, tend to lean on accrual accounting because it lines up better with how they operate day to day. It is also the method most lenders and investors prefer to see, since it shows the full financial story rather than just the cash snapshot.
Cash vs Accrual: A Quick Comparison
| Feature | Cash Accounting | Accrual Accounting |
|---|---|---|
| When income is recorded | When payment is received | When the sale happens or invoice is issued |
| When expenses are recorded | When you pay the bill | When the bill is received or incurred |
| Complexity | Simple, low admin | More detailed, more admin |
| Best suited for | Sole traders, tradies, cafes, small retail | Businesses on credit terms, businesses with stock |
| GST reporting | Allowed under $10 million turnover | Required once turnover reaches $10 million |
| Shows | Cash on hand | Profit and loss over time |
How the ATO Treats Cash and Accrual for GST
This is where a lot of small business owners get a bit mixed up, because there are really two separate decisions going on. One is how you keep your own books day to day. The other is how you report GST on your BAS. They do not always have to match, though most businesses keep it simple and use the same method for both.
For GST, you can use the cash method if your aggregated turnover, that is your turnover added to that of any closely linked entities you run, sits under $10 million. You can also use cash accounting for GST if you already account for income tax on a cash basis. Once your turnover climbs past that $10 million mark, the ATO generally expects you to switch to the non-cash method, though there are some exceptions for charities and government schools. If your GST reporting method does not match what you are actually eligible for, it can cause headaches at BAS time. Getting your quarterly BAS lodgement handled by someone who checks this properly can save you the trouble.
Pros and Cons of Cash Accounting
Cash accounting has real strengths, but it is not perfect for every business. Here is a quick breakdown.
Advantages:
- Easy to understand and manage without much accounting knowledge
- Shows exactly how much cash you have available right now
- Delays GST payments until customers pay you
- Works well if your income mostly comes from your own labour
Disadvantages:
- Can give a misleading view if you have a pile of unpaid invoices
- Does not show money you owe suppliers, only what you have already paid
- Harder to compare performance across different periods
- Less useful for spotting trends as your business grows
Pros and Cons of Accrual Accounting
Accrual accounting takes more effort, but for a growing business, the extra detail often pays off.
Advantages:
- Gives a true read on your profit, not just cash in the bank
- Matches income and expenses to the period they relate to
- Preferred by banks and investors when you are seeking finance
- Keeps you ready for the switch if your turnover crosses $10 million
Disadvantages:
- More admin, since you are tracking invoices and bills as well as payments
- You might owe GST on income you have not been paid yet
- Needs a bit more bookkeeping discipline to stay accurate
- Harder to know your real bank balance at a glance
Which Method Suits Your Business?
There is no single right answer here. It really comes down to how your business operates day to day. A few things to think about:
- How you get paid. If customers pay you on the spot or within a few days, cash accounting is usually simpler and just as accurate.
- Whether you invoice on terms. If you regularly wait 30, 60, or even 90 days to get paid, accrual accounting gives you a much clearer view of what you have earned.
- Whether you carry stock. Businesses holding inventory tend to need accrual accounting to track things properly.
- Your growth plans. If you are edging towards that $10 million turnover mark, it makes sense to get comfortable with accrual accounting sooner rather than later.
- How much time you have for admin. Cash accounting is lighter on your plate. Accrual takes more consistent bookkeeping.
If you are not sure which camp your business falls into, a quick chat with someone who does this day in and day out helps. A virtual bookkeeping team that already works across Xero, MYOB, and QuickBooks can usually tell within a few minutes which method fits your setup.
Can You Switch Between the Two?
Yes, and plenty of businesses do switch as they grow. If your turnover is under the $10 million threshold, you generally have the flexibility to choose whichever GST method suits you, and you can apply to change it if your circumstances shift. That said, switching is not something to do on a whim. It affects how your reports read, how your BAS is calculated, and sometimes how much tax you owe in the transition period. Having your bookkeeping handled end to end during that switch means someone is actually watching for the bits that usually get missed.
Getting Your Books Right From the Start
Cash and accrual accounting are not about which one is “better” in some absolute sense. They are tools, and the right one depends on how your business works. A tradie getting paid on the day of the job has very different needs to a wholesaler invoicing clients on 60 day terms. Once you understand the basic difference, the choice usually becomes a lot clearer.
If you are still weighing it up, or your current setup does not feel right anymore, it is worth a second opinion. The team at Advancr can walk you through your options and set up bookkeeping that actually matches how your business runs.