Cash vs accrual accounting: what's best for your business?

There are two primary accounting methods: cash and accrual accounting. The accounting method you choose will affect many aspects of your business, including how you report on business income and expenses.

The choice plays out in three places, and the rules differ for each. For your own management reports, you can choose. Financial statements prepared under Australian Accounting Standards (for example, the audited reports large proprietary and public companies lodge with ASIC) must use the accrual basis, except for the cash flow statement.

For goods and services tax (GST), you can account on a cash basis only if your aggregated turnover is under $10 million or you meet another ATO test; otherwise you use the non-cash (accruals) method. For income tax, there is no turnover threshold: the ATO’s view is that most trading businesses, and most businesses with employees and capital doing the earning, should return income on an earnings (accruals) basis, while some small personal-services businesses can use the receipts (cash) basis. Businesses that sell trading stock generally must return income on an earnings (accruals) basis, whatever their size.

Let’s talk more about cash vs. accrual accounting and how to get help if you don’t know how to make the change.

What is accrual accounting?

With accrual accounting, you track your income and expenses when they take place, regardless of when you pay bills or receive payments. For example, revenue from services already delivered is recognised even if the client has not paid or you have not yet invoiced. An advance invoice does not automatically create revenue: defer it until the relevant performance obligation is satisfied. Likewise, accrue expenses when incurred, even before the bill arrives.

Accrual books are normally kept in a double-entry system, where every transaction is recorded as a debit in one account and a matching credit in another. Double entry makes errors easier to catch and the books harder to manipulate.

Organisations of any size can use it. It provides a more complete financial picture, even when you don’t get paid right away for your products or services.

Here are the key pros and cons of the accrual accounting method:

Pros	Cons
It’s helpful when tracking a variety of accounts and large amounts of revenue and expenses.	It’s more complicated because you have to track actual cash on hand plus outstanding income and costs.
Making financial projections and planning for the future is easier.	Financial reports may need adjustments for as-yet-unpaid amounts when discussing current balances.
Double-entry records make it simpler to catch mistakes or fraud.	Bookkeeping and accounting may be more time-consuming.
It’s the basis Australian Accounting Standards require for financial statements.	If you also account for GST or income tax on an accruals basis, you can owe tax on invoices customers haven’t paid yet.

How does accrual accounting work?

Accrual accounting records income when you earn it and expenses when you incur them, whenever the cash moves.

When you complete a service and invoice it, you record the income and an account receivable (money owed to you) straight away. When a supplier’s bill arrives, you record the expense and an account payable (money you owe), even if you haven’t paid it yet. Your reports then show everything you’ve earned and owe, including amounts that will settle in later periods.

What is cash basis accounting?

Businesses that have an aggregated turnover of less than $10 million may use the cash basis to account for goods and services tax (GST).

Under cash accounting, you record income when you receive payment and expenses when you pay them. In other words, when you make a sale on credit, you don’t record the revenue until you actually get paid.

Whatever their turnover, some organisations can also account for GST on a cash basis, including certain charities, government schools and gift-deductible entities.

Here are some pros and cons to consider:

Pros	Cons
It works best for small companies that don’t have long payment cycles.	Cash basis accounting doesn’t show the bills you still owe (accounts payable) or the invoices customers still owe you (accounts receivable).
Cash accounting helps you track cash flow and determine what is in your bank accounts.	You may not be prepared for incoming invoices from vendors or suppliers.
It’s simple because you only record transactions when cash moves.	Not every business can use the cash basis for GST or income tax.

How cash basis accounting works

With cash basis, you only record transactions when money moves. Each time a customer pays you, you record income.

Each time you pay a bill, you record an expense. What it can’t show you is what’s still to come: invoices customers haven’t paid yet and bills you haven’t paid yet.

What are the main differences between cash and accrual basis accounting?

Cash vs. accrual accounting differs primarily in the way you keep records and detail your cash flow.

It’s easier to track with cash accounting because you only track funds when they come in and go out. However, it doesn’t show the full picture of your financial health. Your cash flow may look favourable, but you could have thousands in unpaid costs that are not readily visible.

Accrual is more complex but also gives you a more accurate picture of your finances. You’re not tracking only actual funds, but also expected income and costs. If you have a floor installation business, for instance, you would report the project income when the work is done, even if the final invoice is outstanding.

Cash or accrual accounting: which is best for your business?

For management reporting, either method can work for a small business with simple cash flows, but most growing businesses get a truer picture from accrual. Many keep their books on accrual and still report GST on a cash basis where they’re eligible, because accounting software can produce both views.

When to use cash basis accounting	When to use accrual accounting
You have a simple revenue stream with little time between invoices and payments	You have complex revenue and cash flow
You value short-term cash flow over long-term projections	You need to know your cash flow total including future projections
Your aggregated turnover is under $10 million and you want to report GST on a cash basis	Your aggregated turnover is $10 million or more, so GST must generally be reported on a non-cash basis

Businesses with aggregated turnover of $10 million or more must generally account for GST on a non-cash (accruals) basis (certain charities, government schools and gift-deductible entities are exceptions), and the ATO expects most trading and larger businesses to return income on an earnings basis. Because the right answer depends on your GST, income tax and reporting needs, confirm your method with your registered tax agent. Even if you’re not required to, you might want to switch your management reporting to accrual to get a better picture of your business finances.

Visory runs bookkeeping, payroll, and accounts payable and receivable for growing businesses. A dedicated team, working with Visory’s AI, Delphi, which the team oversees, keeps your books current on the basis that suits your reporting, and Visory Insights turns the numbers into decisions. Book a discovery call to talk it through.