[et_pb_section fb_built=”1″ custom_padding_last_edited=”off|desktop” _builder_version=”4.27.2″ custom_margin=”0px||0px||false|false” custom_padding=”0px||0px||false|false” custom_padding_phone=”0px||||false|false” da_disable_devices=”off|off|off” locked=”off” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on”][et_pb_row column_structure=”1_3,2_3″ _builder_version=”4.27.2″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” width=”100%” custom_margin=”0px||0px||false|false” custom_padding=”0px||0px||false|false” global_colors_info=”{}”][et_pb_column type=”1_3″ module_class=”table-contents” _builder_version=”4.23″ background_color=”#f3f2f6″ custom_padding=”25px||25px||true|false” sticky_position=”top” sticky_limit_bottom=”section” sticky_position_tablet=”top” sticky_position_phone=”none” sticky_position_last_edited=”on|desktop” border_radii=”on|24px|24px|24px|24px” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.23″ text_font=”||||||||” global_colors_info=”{}” background__hover_enabled=”on|desktop”][\/et_pb_text][\/et_pb_column][et_pb_column type=”2_3″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Definition description + related terms” _builder_version=”4.27.6″ header_2_font_size=”32px” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” global_colors_info=”{}”]<\/p>\n
When it comes to managing your business\u2019s finances, one of the first and most important decisions you\u2019ll make is choosing the right accounting method. For lots of small businesses here in Australia, this will boil down to one comparison in particular: accrual accounting or cash accounting. Both methods come with their own pros and cons, and the best fit will ultimately depend on your business model, stage of growth, reporting needs, and other considerations.<\/p>\n
So let\u2019s take a look at some of the core differences between cash basis accounting and accrual basis accounting, explaining how each one will influence your financial reporting<\/a> and why one method might be better than the other for your business.<\/p>\n <\/p>\n [\/et_pb_text][et_pb_image src=”https:\/\/www.reckon.com\/au\/wp-content\/uploads\/2025\/06\/Accrual-vs-Cash-Accounting-graphic.png” alt=”accrual vs cash accounting difference is that cash accounting records transactions when money changes hands, where as accrual accounting records revenue when earned ” title_text=”Accrual Vs Cash Accounting Graphic” align=”center” _builder_version=”4.27.6″ _module_preset=”default” global_colors_info=”{}”][\/et_pb_image][et_pb_text _builder_version=”4.27.6″ _module_preset=”default” hover_enabled=”0″ global_colors_info=”{}” sticky_enabled=”0″]The biggest difference between the cash method and the accrual method of accounting lies in when you record transactions.<\/p>\n Cash accounting records transactions for money when it changes hands, so it gives you a real-time snapshot of cash that’s available. Cash basis accounting is most often used by sole proprietors and very small businesses (i.e., micro-businesses) that primarily deal with cash transactions.<\/p>\n Because it\u2019s so simple, the cash method is easy to manage for businesses without lots of inventory or receivables. It can also give you some short-term tax advantages \u2013 since you\u2019re only taxed on income when it\u2019s received, you can time your payments and income to lower your tax burden in a given tax year.<\/p>\n But this method can also give a misleading view of your business\u2019s financial health. Say you provided services worth $50,000 in a month but only received $10,000 in that period. On paper, cash accounting shows just $10,000 in revenue \u2013 ignoring the money owed.<\/p>\n Cash accounting also doesn\u2019t track accounts receivable or accounts payable<\/a>, which can make it harder to manage your liabilities and plan for the future. While it works for lots of small businesses, it might become a hassle as your operations expand.<\/p>\n Accrual accounting records income when it’s earned and expenses when they’re incurred, not necessarily when the payment happens. So you end up getting a far more accurate picture of your company’s financial performance. This makes accrual accounting take a more holistic approach.<\/p>\n Under the accrual system, you\u2019ll track accounts receivable and accounts payable, which is easier for managing liabilities and forecasting your future cash flow. The method also aligns with the Australian Accounting Standards Board (AASB), which is important for businesses that want to scale up or present their financials to investors.<\/p>\n Another feature of the accrual accounting method is the matching principle. This requires businesses to match expenses and revenues generated in the same reporting period.<\/p>\n One important downside? You might end up having to pay taxes on income before it\u2019s actually received. If you invoice $20,000 in June but your client doesn\u2019t pay until August, for example, then the ATO will consider that income for June. If your client doesn\u2019t pay at all, reclaiming the taxes paid on that income can be time-consuming and stressful.<\/p>\n Still, for many growing businesses, the accrual accounting method is far more transparent and can help you make better decisions around scaling.<\/p>\n Here is a simple example of the difference betwee cash and accrual accounting. Imagine a gardening business completes $30,000 of work in March and invoices all of their clients on the 31st, with 30-day terms for payment.<\/p>\n While the cash basis shows available funds, the accrual method shows actual business activity. It might not seem overly important now, but such a distinction becomes much more important as your business grows. It is especially useful if you’re dealing with larger contracts or deferred payments, and for bookkeeping and tax preparation.<\/p>\n Your choice between cash or accrual accounting has a big impact on how and when you pay taxes. With cash accounting, your tax obligations are based solely on actual payments received during the financial year. With accrual accounting, you\u2019re taxed based on earned income<\/a> \u2013 regardless of when the cash comes in.<\/p>\n For small businesses that want to defer tax or manage tight cash flow, the cash basis method might give you more flexibility in the short term. But if you deal with large volumes of invoicing or need to keep detailed financials for funding, accrual accounting will probably be the more strategic choice.<\/p>\n Keep in mind that if your business earns more than $10 million in annual turnover, you\u2019re required to use the accrual accounting method under AASB standards.<\/p>\n Hot tip:<\/strong><\/em><\/span> Many businesses use Modern accounting software to help manage their financial transactions, financial reports, and recordkeeping to meet all their reporting obligations.<\/p>\n [\/et_pb_text][et_pb_image src=”https:\/\/www.reckon.com\/au\/wp-content\/uploads\/2025\/06\/Accrual-and-cash-accounting-business-fit-4.png” alt=”Accrual and cash accounting uses” title_text=”Accrual And Cash Accounting Business Fit 4″ _builder_version=”4.27.6″ _module_preset=”default” custom_margin=”-50px||||false|false” global_colors_info=”{}”][\/et_pb_image][et_pb_text _builder_version=”4.27.6″ _module_preset=”default” global_colors_info=”{}”]<\/p>\n Lots of small businesses start with the cash basis because it\u2019s the simplest tool, then switch over to accrual accounting as their business grows and their reporting needs become much more complex. Here are a few situations that might help with your decision:<\/p>\n Before deciding, it\u2019s worth getting professional advice from an accountant or tax agent, as they can help you weigh up the differences between accrual and cash basis accounting and how each would affect your business\u2019s balance sheet and tax obligations.<\/p>\n [\/et_pb_text][et_pb_text admin_label=”Related terms” _builder_version=”4.27.4″ header_2_font_size=”32px” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” locked=”off” global_colors_info=”{}”]<\/p>\n See related terms<\/strong> <\/p>\n [\/et_pb_text][ba_social_share icon_bg=”#03002e” icon_padding=”10px|12px|10px|12px|true|true” layout=”classic” show_text=”off” btn_padding=”0px|0px|0px|0px|false|false” btn_bg_color=”RGBA(255,255,255,0)” _builder_version=”4.23″ _module_preset=”default” custom_margin=”50px||||false|false” custom_padding=”25px||||false|false” custom_css_before=” content: %22SHARE THIS%22;|| font-size: 16px;|| font-weight: 700;|| line-height: 22px;|| letter-spacing: 0em;|| text-align: center;|| color: #ff5447;|| margin-bottom: 10px;|| display: inline-flex;|| position: absolute;|| margin-top: 10px;” border_width_top_main=”1px” border_color_top_main=”#e4e4e4″ border_radii_icon=”on|5px|5px|5px|5px” global_colors_info=”{}” custom_css_before_last_edited=”off|desktop”][ba_social_share_child _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][ba_social_share_child network_type=”facebook” _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][ba_social_share_child network_type=”linkedin” _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][ba_social_share_child network_type=”email” _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][\/ba_social_share][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":" When it comes to managing your business\u2019s finances, one of the first and most important decisions you\u2019ll make is choosing the right accounting method. For lots of small businesses here in Australia, this will boil down to one comparison in particular: accrual accounting or cash accounting. Both methods come with their own pros and cons, […]<\/p>\n","protected":false},"author":35,"featured_media":0,"menu_order":0,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"","footnotes":""},"class_list":["post-293957","glo","type-glo","status-publish","format-standard","hentry"],"yoast_head":"\nUnderstanding the difference<\/h2>\n
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What is cash basis accounting?<\/h2>\n
What is accrual accounting?<\/h2>\n
A practical example of accrual vs cash accounting<\/h2>\n
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Tax implications<\/h2>\n
Which method is best for your business?<\/h2>\n
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What are assets?<\/a>
What is capital?<\/a>
What is accounting?<\/a><\/p>\n