• 05 April, 2025

Choosing the right accounting method is crucial for Australian small businesses, especially when it comes to staying compliant with ATO rules and accurately reporting your finances. The choice between cash accounting and accrual accounting affects when income and expenses are recorded, impacting your financial statements and tax reporting.

• Cash accounting records income and expenses only when money is received or paid.

• Accrual accounting records income when it’s earned (invoiced) and expenses when they’re billed, regardless of cash flow.

Note: This is different from the GST reporting methods (cash vs non-cash accruals) used for BAS lodgements.

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Accrual Accounting: A Complete Picture

Accrual accounting recognises assets, liabilities, equity, income, and expenses in the period they relate to, even if cash hasn’t been exchanged. This method is ideal for businesses with inventory, accounts receivable, or accounts payable, offering a comprehensive view of financial performance.

Key features of accrual accounting:

• Tracks accounts receivable (money owed to your business).

• Tracks accounts payable (future obligations to pay).

• Provides detailed insights into business health for ATO compliance, audits, and decision-making.

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Cash Accounting: Simple and Straightforward

Cash accounting is simpler and easier to manage, making it ideal for small service-based businesses that receive payments immediately after providing services, such as:

• Consultants

• Tradespeople

• Small medical practices

Key points of cash accounting:

• Records income only when cash is received.

• Records expenses only when cash is paid out.

• Does not track receivables, payables, or inventory.

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Cash vs Accrual Accounting Example

Jake, a handyman, completes a job and invoices a client for $2,200 on 18 June 2021 (2020/21 financial year). The client pays on 2 July 2021 (2021/22 financial year).