What each method means
Cash accounting records income when you receive money and expenses when you pay cash. It’s straightforward, aligns with your bank account, and helps owners focus on cash flow.
Accrual accounting records income when it’s earned (for example, when you issue an invoice or deliver a service) and expenses when they’re incurred (for example, when you receive a supplier bill), even if cash hasn’t changed hands yet. It provides better profitability and performance reporting across periods.
Australian context to keep in view
- GST and BAS: Small businesses with GST turnover under $10 million can generally choose to account for GST on a cash basis. On accrual (non-cash) basis you attribute GST when invoices are issued/received. Confirm your eligibility and obligations with the ATO or a BAS agent.
- Income tax timing: Income tax recognition follows Australian tax law on when income is derived and expenses are incurred. Many micro and service businesses effectively report on a cash basis, while businesses with inventory or long projects often use accrual. A tax accountant can confirm what fits your situation.
- Software support: Xero, MYOB and QuickBooks all support cash or accrual reporting and GST methods. A good bookkeeper will configure this correctly and document the workflow.
Key differences at a glance
Timing of income
Cash: when money is received. Accrual: when earned or invoiced.
Timing of expenses
Cash: when money is paid. Accrual: when the cost is incurred or the bill is dated.
GST and BAS
Cash: report GST when cash moves (if eligible). Accrual: report when invoices/bills are issued.
Reporting and decisions
Cash: great for cash flow focus. Accrual: better for profitability, margins, aged receivables/payables and budgeting.
Complexity
Cash: simpler setup. Accrual: more moving parts (invoices, bills, inventory, cut-off adjustments).
Who it suits
Cash: micro businesses and short payment cycles. Accrual: growing firms, inventory, jobs/projects, or where lenders/stakeholders need full financials.
When cash accounting makes sense
- You’re a micro or small business with few unpaid invoices at period end.
- You prioritise a view that mirrors bank movements to manage cash tightly.
- You want simpler BAS preparation and you’re eligible to report GST on cash.
- Your industry is service-based with short payment terms and minimal inventory.
Many sole traders and new businesses start on cash, then switch to accrual as they grow.
When accrual accounting makes sense
- You invoice on terms (e.g. 14–30+ days) and want accurate monthly profitability.
- You have inventory, work-in-progress or project milestones to track.
- You need budgets/forecasts, departmental reporting or external finance.
- You want consistent performance comparisons across periods regardless of cash timing.
Practical examples
Example 1: Tradie issuing invoices on 30-day terms
In July you issue $20,000 of invoices and receive $8,000 in July, $12,000 in August.
- Cash basis July revenue: $8,000 (cash received).
- Accrual basis July revenue: $20,000 (invoiced/earned in July).
Example 2: Retailer with inventory
You buy stock in June and sell it in July.
- Cash basis: expense appears when you pay the supplier (June).
- Accrual basis: cost is matched to July sales via cost of goods sold, giving clearer margins.
GST and BAS implications
- Cash basis for GST: You report and pay/claim GST when money is actually received or paid. Often preferred for cash flow by eligible small businesses.
- Accrual (non-cash) basis for GST: You report GST when you issue or receive invoices, regardless of payment timing.
- Eligibility: Small businesses generally qualify for cash basis if GST turnover is under $10 million. Always confirm with the ATO or your BAS agent.
- Consistency: Keep your software settings, bookkeeping workflow and BAS method consistent to avoid misstatements.
Switching methods without a mess
- Pick an effective date (often at the start of a BAS or financial year).
- Adjust software settings (reporting basis and GST method) in Xero/MYOB/QuickBooks.
- Reconcile opening balances and clear up unpaid invoices/bills to prevent double counting.
- Document the cut-off rules so future periods are clean.
- Notify the ATO of your GST reporting method if it changes, or ask your agent to lodge the update.
A bookkeeper can handle the technical migration, and a tax accountant can confirm tax timing impacts.
What to compare before you commit
Scope
Confirm the setup, GST/BAS configuration, catch-up work and reporting you need on cash accounting vs accrual accounting.
Software fit
Choose a provider fluent in your tools who can explain the workflow, not just name the software.
Turnaround and communication
Agree on month-end dates, BAS timelines and how issues are escalated.
Commercial fit
Match pricing method, reporting depth and whether you want compliance only or ongoing advisory.
Best next steps
Decide what you need your numbers to do for you: simpler cash visibility, smoother BAS, better margins, or lender-ready financials.
If you’re still weighing up cash accounting vs accrual accounting, start with the hubs below or jump straight to a service:
- Accounting services for end-to-end support.
- Bookkeeping to configure methods and keep books tidy.
- BAS agent services for GST/BAS method advice.
- Tax accountant to confirm income tax timing.
- Small business accountant if you’re growing and need accrual reporting.
Frequently asked questions
What is the difference between cash accounting and accrual accounting?
Cash basis recognises income and expenses when money changes hands. Accrual basis recognises them when they’re earned or incurred, which is usually when invoices and bills are dated.
Which method should a small business use?
Use cash for simplicity and a view that mirrors your bank account. Use accrual if you invoice on terms, carry inventory, need accurate monthly margins, or report to lenders/investors.
How does GST/BAS differ on cash vs accrual?
Cash basis GST is attributed when you receive or pay money. Accrual (non-cash) GST is attributed when you issue invoices or receive bills. Many small businesses under the $10m GST turnover threshold can choose cash basis for GST—confirm with a BAS agent.
Can I switch methods during the year?
Yes, but plan it. Choose an effective date, update software and GST method, and reconcile opening balances and outstanding invoices/bills so you don’t double count or miss amounts.
Does the choice affect tax?
It can. Income tax follows Australian rules for when income is derived and expenses incurred. Many micro businesses effectively report on cash; others need accrual for accuracy. Get confirmation from a registered tax agent.