When it comes to business bookkeeping, one of the first decisions you’ll need to make is which accounting method to use: cash or accrual. It can affect everything from how you track income to how you plan for tax.
In this article, we’ll break down the difference between cash and accrual accounting and help you work out which approach suits your business best.
There are two main accounting methods: cash basis vs accrual basis. While both are valid ways of managing your books, they treat the timing of income and expenses differently.
Cash accounting is like looking at your wallet—you only count what's actually there. Accrual accounting is more like keeping track of all the money you're owed and all the bills you need to pay, giving you a bigger picture of your financial situation. Both have their place, and the right choice depends on how your business operates.
Main differences between cash and accrual basis of accounting:
|
Feature |
Cash Accounting |
Accrual Accounting |
|
When income is recorded |
When you actually get paid |
When you've earned the money (even if you haven't been paid yet) |
|
When expenses are recorded |
When you pay the bill |
When you owe the money (even if you haven't paid yet) |
|
Suits businesses that... |
…deal mostly in cash or immediate payments |
…send invoices and wait to get paid |
|
Complexity |
Straightforward |
More involved |
|
Financial visibility |
Shows how much cash you have right now |
Shows the full picture of your business performance |
|
Reporting timing |
Focuses on actual cash flow |
Matches income with the expenses that created it |
Cash accounting is exactly what it sounds like – you only record things when cash actually moves. This approach works great for small businesses, sole traders or businesses that mainly deal in cash and don’t have many outstanding invoices or debts.
Sarah runs a busy cafe and deals with customers paying immediately—cash, card or tap-and-go. She also orders coffee beans from her supplier monthly and pays the invoice when it arrives.
Freelance Graphic Designer
Joe completes client projects and sends invoices, but clients often take 30-60 days to pay. He also purchases business expenses throughout the month but might not pay those bills immediately.
Local Handyman
James runs a small handyman business and gets paid immediately after completing each job. He buys materials as needed and pays for them at the hardware shop on the spot.
Cash accounting keeps things simple, but there are some trade-offs you should know about.
|
Benefits |
Drawbacks |
|
Easy to understand and manage |
Doesn't show how your business is actually performing |
|
You can see your cash situation clearly |
Doesn’t show money owed to you or by you |
|
Less paperwork and admin |
Hard to scale as you grow |
|
Tax benefits (only pay tax on money you've actually received) |
Can make long-term planning harder |
Accrual accounting records income when it’s earned and expenses when they’re incurred, regardless of when cash changes hands. This method gives a more complete picture of your business’ financial position.
It’s often used by larger businesses, or those that issue invoices, offer credit, or manage stock.
Here’s an easy way to understand the difference between cash and accrual accounting. Imagine you buy materials in February for a big March project, then get paid for that project in June. Under cash accounting, you'd show a loss in February (materials cost), break-even in March (no transactions), and a big profit in June (payment received)—even though it's all the same project. Instead, accrual accounting puts all the related income and expenses in March, when the work happened. This gives you an accurate view of that project's profitability and your business performance each month.
Tom's construction business completes a major home renovation in March. The project required materials purchased in February, and the client has 90 days to pay after final inspection and invoicing.
Emma's e-commerce business ships products in December with net-30 payment terms, meaning customers pay in January. She needs to track which sales belong to which month for proper business analysis.
David's agency works on client campaigns throughout January, sends invoices at month-end, and typically receives payment 30 days later in February.
Accrual accounting gives you the full picture but comes with more complexity than cash accounting. Here are some pros and cons to weigh up:
|
Benefits |
Drawbacks |
|
Shows how your business is really performing |
More complicated to set up and maintain |
|
Better for planning and forecasting |
Need better systems to track everything |
|
Matches income with the costs that created it |
Might show profit when you're actually cash-poor |
|
Required for bigger businesses |
More expensive to manage |
So, how do you choose between accrual vs cash accounting? Here are some things to consider:
The Australian Taxation Office (ATO) has specific rules governing when businesses can use accrual versus cash accounting for tax purposes.
Key compliance requirements:
Always consult with a qualified accountant or bookkeeper to ensure your chosen method meets all legal and tax obligations for your business.
When you’re choosing between cash accounting vs accrual accounting, the right support makes all the difference. A good bookkeeper can help you set up the best method for your business and keep you compliant with ATO rules.
With the right accounting software, managing your books becomes much simpler. QuickBooks supports both cash and accrual methods, automatically handles complex transaction timing, and gives you clear, easy-to-read reports.
Grow your business with confidence. Explore QuickBooks or talk to a ProAdvisor today.
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