Accrual vs Cash Accounting Basics

Your profit and loss says you made money, but the bank account says otherwise — or the reverse. For most small business owners, the confusion comes down to a question nobody ever explained: are your numbers on a cash basis or an accrual basis?

The distinction matters more than usual in Australia, because it affects both how your reports read and how you report GST on your BAS. These choices are related but separate, and mixing them up causes real headaches.

Cash accounting: record it when the money moves

Under cash accounting, income is recorded when the customer pays you and expenses are recorded when you pay them. It is simple, intuitive and closely matches the bank account. The weakness is timing: a strong month of invoicing looks like nothing until the money arrives, and a quiet month can look great because old invoices finally got paid.

Accrual accounting: record it when it is earned or owed

Under accrual accounting, income is recorded when you issue the invoice and expenses when you receive the bill, regardless of when money changes hands. An invoice you issue just before 30th June but collect in July belongs to the earlier year under accruals. This gives a truer picture of performance, which is why accountants and lenders prefer it, but it also means profit and cash can tell very different stories.

Which view should you manage from?

Accrual reports answer whether the business is actually profitable. Cash reports answer whether you can pay your bills this month. You genuinely need both answers, and modern accounting software can usually show your reports either way at the flick of a setting. What matters is knowing which view you are looking at before you make a decision from it.

GST is a separate choice

Separately from how your accounts are prepared, you choose a basis for reporting GST on your BAS: cash or non-cash (accruals).

• Cash basis GST: you account for GST in the period you receive or make payment. Your BAS follows your bank account, which is kinder to cash flow — you are not paying GST on invoices your customers have not paid yet.
• Non-cash basis GST: you account for GST in the period you issue or receive the invoice, whether or not money has moved.

Smaller businesses can generally choose to account for GST on a cash basis if their turnover is under the eligibility limit — check the current ATO threshold. Larger businesses generally must use the non-cash basis.

Yes, you can mix them

Plenty of small businesses keep accrual-based accounts for management and reporting while lodging their BAS on a cash basis, and good software handles the translation automatically. The important thing is that the choice is deliberate and consistent, because switching basis carelessly creates errors in your GST reporting. If you are not sure which basis your file is set to, check the GST settings in your software — and make sure they match what the ATO has on record for you.

Can my accounts be on accruals while my GST is on a cash basis?

Yes, and it is a very common setup for small businesses. Your accounting software keeps the accrual view for reporting while calculating the BAS on a cash basis.

Which basis is better for a new small business?

Cash basis GST is usually gentler on cash flow, because you only account for GST once customers have paid you. The right accounting view depends on your circumstances, so it is worth discussing when you set up your file.

Can I change my GST reporting basis later?

Generally yes, if you remain eligible, and the change takes effect from the start of a tax period rather than partway through. Talk to your tax or BAS agent before switching so the transition is handled cleanly.