- Cash records money when it moves, accrual records it when invoiced.
- GST cash accounting is open to businesses under $10 million turnover.
- Most growing businesses move to accrual as turnover and complexity increase.
Cash vs accrual accounting is the first real decision every Australian business owner faces when setting up their books, and it shapes how you see your cash flow every single day. Cash accounting records income and expenses when money actually moves. Accrual accounting records them when you issue an invoice or receive a bill, regardless of when cash lands. Both methods are legal in Australia, and both affect your BAS, your GST reporting, and how clearly you can see whether you’re actually making money. The right choice depends on your turnover, your industry, and how closely you track performance.
What’s the short answer: cash or accrual?
If your business is small, gets paid upfront, and you want simple GST reporting, cash accounting usually works best. If you invoice clients on terms, carry stock, or need a true picture of profit, accrual accounting suits you better. Sleek’s accounting service can set either method up correctly from the start, so your reports match your actual obligations.
|
Feature |
Cash accounting |
Accrual accounting |
|---|---|---|
|
Income recorded |
When payment is received |
When invoice is issued |
|
Expenses recorded |
When payment is made |
When bill is received |
|
GST basis |
Available under $10 million turnover |
Required above $10 million turnover |
|
Cash-flow clarity |
High, mirrors your bank balance |
Lower, shows owed amounts too |
|
Complexity |
Low |
Higher |
|
Best for |
Sole traders, trades, small retail |
Businesses on credit terms, larger SMEs |
Both methods are ATO-approved, so neither is “wrong.” The table above shows why most small, cash-based businesses default to the cash method, while businesses managing debtors and creditors lean towards accrual.
How does cash-basis accounting work?
With cash-basis accounting, you record income when the money actually lands in your account, and expenses when you actually pay them. Nothing counts until cash changes hands.
Say you’re a sole trader graphic designer. You invoice a client for $2,000 in June, but the client pays in July. Under cash accounting, that $2,000 counts as July income, not June.
The same rule applies to expenses. If you buy a new laptop in June but pay the invoice in July, the deduction falls in July too. This makes cash accounting easy to track because your books mirror your actual bank balance. If you’re weighing up whether your current setup can handle this properly, it helps to understand when you need bookkeeping software before you commit to a system.
How does accrual accounting work?
With accrual accounting, you record income when you issue the invoice and expenses when you receive the bill, regardless of when cash changes hands. The transaction date, not the payment date, drives your reports.
Take a construction subcontractor who invoices a builder $15,000 in June for completed work, even though payment isn’t due until August. Under accrual accounting, that $15,000 counts as June income, alongside any materials bills received that month.
This gives you a clearer view of what your business has earned and owes at any point, not just what sits in the bank. Most cloud accounting platforms default to accrual reporting, and if you use Xero, our Xero accounting explained article breaks down how the platform tracks both invoices and payments.
Cash vs accrual for GST reporting: what does the ATO say?
The ATO lets eligible small businesses choose either method for GST, based on turnover, not business type. This is one of the most common questions Australian owners ask when setting up their books.
You can account for GST on a cash basis if your aggregated turnover, meaning your turnover plus that of any closely associated entities, is under $10 million. You can also use the cash method if you account for income tax on a cash basis, or if your enterprise isn’t run as a business and its GST turnover is $2 million or less.
Once your aggregated turnover reaches $10 million, the ATO generally requires the non-cash method, though endorsed charities, gift-deductible entities, and government schools can still use cash regardless of turnover. Getting your reporting basis wrong can trigger BAS corrections, so confirm your eligibility before you lodge. For how PAYG instalments fit alongside your reporting method, see PAYG and reporting.
What are the pros and cons of each method?
Cash accounting works well for simplicity but has real limits once your business grows.
Cash accounting pros:
- Simple to manage day to day, with your books matching your bank balance
- Easier to see exactly how much cash you have on hand
- Suits sole traders and small retail or trade businesses
Cash accounting cons:
- Only available for GST if your aggregated turnover is under $10 million
- Doesn’t show money owed to you or bills you still owe
- Can make it harder to spot slow-paying clients early
Accrual accounting pros:
- Shows a true picture of profit, debtors, and creditors
- Better for planning, forecasting, and attracting investors
- Required once your turnover passes the ATO threshold
Accrual accounting cons:
- More complex to manage without good software
- Can show a profit on paper even when cash is tight
- Usually needs a bookkeeper or accountant to stay accurate
TIPCheck your bank balance and your accrual reports side by side each month, so a healthy invoice total never hides a cash shortage.
If you’re weighing up software as well as method, our best accounting platforms roundup compares tools built for both approaches.
Which method should your business use?
For most sole traders, tradies, and small retail businesses with turnover under $10 million, cash accounting is the simpler, more practical choice. Once you invoice on terms, carry stock, or your turnover approaches that $10 million mark, accrual gives you a truer read on performance.
Growing businesses often start on cash and move to accrual as they scale, since accrual makes it easier to manage debtors and plan ahead. Sleek bookkeeping sets up the right chart of accounts for either method, so your reports stay accurate from day one.
If you’re still unsure, a quick conversation with an accountant beats guessing, since switching later takes time and, in most cases, needs ATO approval.
Can you switch accounting methods?
Yes, you can switch, but the change only takes effect from the first day of a tax period, and depending on the direction of the switch you or your accountant may need to notify the ATO first. Moving up to accrual usually means notifying the ATO, while moving down to cash when your turnover is under $10 million generally doesn’t need approval.
To move from cash to accrual, you contact the ATO directly, or your accountant does it on your behalf. In your first reporting period under the new method, you must account for any sales you’d already invoiced but not yet been paid for, and any purchases you’d received but not yet paid for.
If this sounds fiddly, it is exactly the kind of task a small business accountant handles routinely, and getting it right the first time avoids BAS corrections later.
How Sleek helps you choose and manage the right accounting method
Sleek’s accountants and bookkeepers set up the method that fits your turnover and industry, then keep your BAS and reports consistent every quarter. Whether you’re moving from cash to accrual or just want your books done properly, the team handles the ATO paperwork so you don’t have to.
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Frequently Asked Questions
What is the main difference between cash and accrual accounting?
Cash accounting records transactions when money moves, while accrual accounting records them when you issue an invoice or receive a bill. This changes when income and expenses appear in your reports, even for an identical sale. For GST, it also changes which BAS period your amounts fall into.
Can a sole trader use cash accounting in Australia?
Yes, sole traders with an aggregated turnover under $10 million can use cash accounting for both income tax and GST. Many prefer it because it’s simple and mirrors their actual bank balance. You don’t need to apply if you meet the turnover test.
Does accrual accounting change how much tax you pay?
Accrual accounting doesn’t change your total tax liability over time, but it can shift when income and deductions get recognised. Your taxable income in a given year may look different from what your bank balance suggests. Over several years, the totals even out.
What happens if your turnover grows past the cash accounting threshold?
Once your aggregated turnover reaches $10 million, the ATO generally requires you to report GST on a non-cash basis. Your accountant needs to plan the transition carefully so sales or purchases don’t get missed or double counted. It’s worth reviewing your turnover each quarter if you’re close to the line.
Is accrual accounting harder to manage than cash accounting?
Accrual accounting generally takes more effort because you’re tracking invoices, bills, and payment timing, not just your bank feed. Good cloud software makes this manageable, but you’ll usually need a bookkeeper to keep the ledger accurate. Cash accounting has less to track day to day.
Can you use different methods for income tax and GST?
Yes, some businesses use cash accounting for GST while using accrual for income tax, or the reverse, depending on what applies to their situation. This combination is less common and adds complexity, so most small businesses keep both methods aligned. An accountant can confirm which combination suits your structure.
Do not-for-profits and charities follow the same cash accounting rules?
Not entirely. Endorsed charities, gift-deductible entities, and government schools can use cash accounting for GST regardless of turnover, unlike ordinary businesses that face the $10 million test. This concession reflects the irregular income many of these organisations receive.
