Published: October 2025
Author: Scale Suite Finance Team
One of the most fundamental decisions in business bookkeeping is choosing between cash and accrual accounting methods. Yet many Australian business owners don't fully understand the difference, leading to confusion, poor financial decisions, and unexpected tax obligations.
The accounting method you use affects everything from your reported profit to your tax timing to your ability to get financing. More critically, misunderstanding your accounting method creates serious problems that compound over time.
This guide explains the difference between cash and accrual accounting, common issues that arise from not understanding these methods, and how to choose the right approach for your Australian business.
Cash accounting (also called cash basis accounting) is the simpler of the two methods. It records income when you actually receive payment and expenses when you actually pay them.
Think of it like your personal bank account. Money in gets recorded as income when it hits your account. Money out gets recorded as an expense when it leaves your account. Simple.
If you invoice a customer $5,000 on 15 June but don't receive payment until 10 July, under cash accounting you record the income in July when the money arrives, not in June when you did the work.
Similarly, if you receive a supplier invoice for $2,000 on 20 June but don't pay it until 5 August, you record the expense in August when you make the payment, not June when you received the bill.
In Australia, businesses with an aggregated turnover of less than $10 million can choose cash accounting for GST purposes. This threshold covers most small and medium businesses.
Certain entities can always use cash accounting regardless of turnover, including endorsed charitable institutions, gift-deductible entities, and government schools.
Accrual accounting (also called accrual basis accounting) records income when you earn it and expenses when you incur them, regardless of when money actually changes hands.
Under this method, when you complete work and invoice the customer, you record the income immediately even if payment won't arrive for weeks. When you receive a supplier invoice, you record the expense immediately even if you won't pay it for 30 days.
Using the same example: you invoice a customer $5,000 on 15 June. Under accrual accounting, you record the income on 15 June when you issued the invoice, not in July when payment arrives.
When you receive that $2,000 supplier invoice on 20 June, you record the expense on 20 June, not in August when you pay it.
In Australia, businesses with turnover exceeding $10 million must use accrual accounting for GST. Many businesses below this threshold choose accrual accounting anyway because it provides better financial visibility.
Most tax returns in Australia are prepared using accrual accounting, even if the business uses cash accounting for BAS. This creates an important consideration we'll discuss shortly.
Confusion about cash versus accrual accounting creates numerous problems for Australian businesses. These issues compound over time and can result in serious financial mistakes.
This is probably the most common misunderstanding among Australian small business owners. They look at their bank balance, see healthy numbers, and assume the business is profitable.
Under cash accounting, you might have $50,000 in the bank after a customer paid a large invoice. But that money needs to cover $30,000 in supplier invoices you haven't paid yet plus $15,000 in upcoming payroll. Your actual available profit is much less than the bank balance suggests.
Many business owners withdraw "profits" that don't actually exist, creating cash flow problems when bills come due.
Under accrual accounting, you might show strong profits on your profit and loss statement but have limited cash because customers haven't paid their invoices yet. This confusion works in reverse - you think you're profitable but wonder why you can't pay bills.
Australian businesses often operate on cash accounting for BAS but accrual accounting for income tax returns. This creates significant confusion about tax obligations.
Consider a business that invoices $100,000 in June but receives payment in July. Under cash BAS, no GST is owed in the June quarter. But under accrual income tax accounting, that $100,000 is taxable income in the current financial year.
Business owners using cash accounting for BAS sometimes mistakenly believe their tax is also calculated on a cash basis. They're shocked when their accountant includes unpaid invoices in taxable income.
Conversely, businesses using accrual BAS might owe GST on invoices they've issued even though customers haven't paid yet. This creates cash flow pressure if they didn't plan for the GST payment.
Understanding when you can claim tax deductions depends heavily on your accounting method and causes frequent errors.
Under cash accounting for income tax, you generally can only deduct expenses when you actually pay them. If you receive supplier invoices in June but don't pay until July (the new financial year), you can't deduct them in the June year.
Under accrual accounting, you can deduct expenses when you incur them, even if you haven't paid yet. This means supplier invoices received in June are deductible in that financial year, regardless of payment timing.
Many business owners claim expenses in the wrong year because they don't understand which method their accountant is using for their tax return.
Not understanding your accounting method leads to poor decisions about pricing, hiring, investing, and growth.
A business using cash accounting might delay paying suppliers to keep cash in the bank, making it look like they're more profitable than they really are. This false profitability might lead to hiring staff or making investments the business can't actually afford.
Alternatively, a business using accrual accounting might panic about low cash balances without realising they have substantial receivables coming. This might cause them to miss good opportunities due to unnecessary caution.
Banks and investors review financial statements to assess business health. If your financial statements don't accurately represent your business performance because you're using the wrong accounting method, obtaining financing becomes difficult.
Lenders typically prefer accrual accounting because it provides a clearer picture of business performance. If you're using cash accounting, banks might require conversion to accrual basis before approving loans.
This conversion often reveals problems that weren't apparent under cash accounting, potentially leading to loan rejection.
Forecasting future performance becomes nearly impossible under cash accounting because you can't see upcoming commitments or expected revenue.
You might forecast strong cash flow based on recent payments, not realising that revenue was from invoices issued months ago and work has dried up since then.
Without visibility into accounts receivable and payable, you're essentially forecasting blind, leading to overly optimistic or pessimistic projections that don't reflect reality.
Under accrual accounting, you record payroll expenses when earned, not when paid. This affects superannuation obligations and payroll tax calculations.
Many businesses make mistakes by recording super when paid (often quarterly) rather than when earned (each pay period). This creates timing differences that can lead to compliance issues and incorrect expense allocation across financial years.
For businesses that sell products, inventory valuation depends on your accounting method and creates significant confusion.
Under accrual accounting, inventory is an asset until sold, and the cost of goods sold is matched to revenue when sales occur. This provides accurate gross profit margins.
Under cash accounting, purchases might be expensed when paid, which doesn't match revenue timing. This makes it difficult to understand true profitability of products or to manage inventory effectively.
If you have business partners, investors, or board members, providing meaningful financial reports requires consistent use of an appropriate accounting method.
Switching between cash and accrual mid-year or presenting different reports using different methods creates confusion and undermines confidence in your financial management.
Depreciation is a concept that exists only in accrual accounting. It represents the decrease in asset value over time without any cash changing hands.
Business owners using cash accounting often don't understand depreciation and either ignore it or misapply it. This creates incorrect expense records and tax compliance issues.
Similarly, when you purchase assets under cash accounting, the full cost gets recorded immediately even though the asset will be used over many years. This makes that period look artificially unprofitable while future periods look artificially profitable.
Selecting between cash and accrual accounting depends on several factors specific to your business.
Many Australian small businesses use cash accounting for BAS (to simplify GST reporting) but accrual accounting for their annual tax return and management reporting.
This hybrid approach provides cash flow visibility through BAS while maintaining accurate performance measurement through accrual-based profit and loss statements.
However, this approach requires understanding both methods and careful management of the differences. Work with your accountant to ensure you're handling the hybrid correctly.
If you need to change from cash to accrual accounting (or vice versa), proper transition management is essential.
During transition periods, financial reports can look unusual as you record transactions that occurred in previous periods under the old method.
Your accountant can help manage this transition and explain how reports will differ during and after the changeover.
The complexity of Australian accounting requirements, particularly when mixing cash and accrual methods, makes professional support valuable for most businesses.
Professional bookkeepers and accountants ensure your accounting method is applied correctly, your tax obligations are calculated accurately, and your financial reports provide meaningful information for decision-making.
Eliminate confusion about your accounting method with professional bookkeeping
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Our Sydney-based team delivers:
We work with businesses at all stages using Xero, MYOB, or QuickBooks to maintain accurate records that support good decision-making.
Our registered BAS agents ensure your GST reporting is correct whether you're using cash or accrual BAS methods, and our understanding of both approaches means we can explain how your method affects your tax obligations.
Whether you need complete bookkeeping support or guidance on applying your accounting method correctly, ScaleSuite delivers professional expertise at a fraction of the cost of hiring in-house staff.
Book a free consultation to discuss how we can bring clarity to your financial reporting.
Can I use cash accounting for some things and accrual for others?
Yes. Many Australian small businesses use cash accounting for BAS (GST reporting) but accrual accounting for their annual income tax return and management reporting. This is perfectly legal and common, but requires careful management to track differences between the two methods.
Which method shows higher profit, cash or accrual?
Neither method inherently shows higher profit over the long term. However, in any specific period they can differ significantly. Accrual accounting might show higher profit when you've issued many invoices that haven't been paid yet. Cash accounting might show higher profit when customers pay old invoices but you're not issuing many new ones. Over the life of the business, total profit should be similar under either method.
Will the ATO audit me if I switch accounting methods?
Switching between cash and accrual accounting is legal and doesn't automatically trigger audits. However, you must apply your chosen method consistently and ensure proper transition accounting. If you switch frequently or appear to be switching to manipulate tax obligations, this might attract ATO attention. Make any changes in consultation with your accountant.
Do I pay less tax under cash accounting?
Not necessarily. Cash accounting can create timing advantages where you delay income or accelerate expenses to manage tax in specific years. However, over the long term, total tax should be similar. The ATO is aware of timing strategies and may scrutinise arrangements that appear designed solely to avoid tax rather than reflect business substance.
Can sole traders use either method?
Yes. Sole traders under $10 million turnover can choose either cash or accrual accounting. Most sole traders use cash accounting for its simplicity, but those with receivables or complex operations benefit from accrual accounting's better financial visibility.
What happens to deposits and prepayments under each method?
This is a common confusion area. Under cash accounting, deposits and prepayments are generally recorded when money changes hands. Under accrual accounting, they're recorded as liabilities (for deposits you receive) or assets (for prepayments you make) until the work is performed or goods delivered. Your accountant should explain how these items are treated under your chosen method.
How do I know which method my accountant is using?
Ask them directly. Your accountant should clearly explain whether your BAS is prepared on cash or accrual basis and which method is used for your income tax return. If you don't know, you can't understand your financial reports properly. Request clarification and ask for explanation of any differences if you're using hybrid approach.
Can I change methods partway through a financial year?
While possible, changing accounting methods mid-year creates significant complexity and confusion in financial reports. If you must change, work closely with your accountant to manage the transition properly and understand how reports will be affected during the changeover period.
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