Cash vs Accrual Accounting

The difference between cash basis and accrual basis accounting comes down to timing. When do you record revenue or expenses? If you do it when you pay or receive money, it’s cash basis accounting. If you do it when you get a bill or raise an invoice, it’s accrual basis accounting.

What is cash basis accounting?

Businesses that use cash basis accounting recognise income and expenses only when money changes hands. But because this doesn’t take upcoming expenses into account, it could leave you with the idea that you have a higher balance than you actually do!

Benefits of cash accounting

It’s simple and shows how much money you have on hand.
It’s an easier option for calculating GST, though not all businesses are allowed to use it – check out the ATO website for specifics

Downsides of cash accounting

It’s not accurate – it could show you as profitable just because you haven’t paid your bills
It doesn’t help when you’re making management decisions, as you only have a day-to-day view of finances

What is accrual basis accounting?

Businesses that use accrual accounting, instead of cash basis, recognise income as soon as they raise an invoice for a customer. And when a bill comes in, it’s recognised as an expense -even if payment won’t be made for another 30 days. This means you have to watch invoices, not just your bank account.

Benefits of accrual accounting

You have a much more accurate picture of business performance and finances
You can make financial decisions with far more confidence
It can sometimes be easier to pitch for long-term finance

Downsides of accrual accounting

It’s more work because you have to watch invoices, not just your bank account
You may have to pay tax on income before the customer has actually paid you – the customer reneges on the invoice, you can claim the tax back on your next return

Some types of businesses use a hybrid accounting system. There are lots of rules around who can and can’t do this. Read more from Xero here.

Please speak to us to find out what applies to you.