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Cash vs. Accrual Accounting Explained

Updated: Apr 6, 2023

Cash and accrual accounting are two different methods of accounting that are used to record and report financial transactions.

Cash accounting is a method of accounting in which transactions are recorded only when cash is received or disbursed. This means that expenses are recorded when they are paid, and revenues are recorded when they are received in cash. This method is generally used by small businesses because it is simple and easy to understand.

Accrual accounting is a method of accounting in which transactions are recorded when they occur, regardless of when the cash is received or paid. This means that expenses are recorded when they are incurred, and revenues are recorded when they are earned, regardless of when the cash is received or paid. This method is generally used by larger businesses because it provides a more accurate picture of a company's financial position.

In summary, the main difference between cash and accrual accounting is the timing of when transactions are recorded.
Cash accounting records transactions when cash is received or paid,
Accrual (non-cash) accounting records transactions when they occur.

Accounting Software Options

The most popular computer software programs in Australia makes handling either accounting methods easy for Income tax returns, BAS lodgement or internal reporting. These include Xero, MYOB and, Quickbooks.


It is vitally important when preparing tax lodgements that you have checked the right accounting method - cash or non-cash (accrual).
If you are unsure consult your tax accountant or BAS agent.


Australian Taxation Office (ATO) Guidelines

for Choosing a GST Method for Business Activity Statements (BAS)


There are two methods of accounting for GST (goods and services tax), a cash basis and a non-cash basis (accruals). The method you use will affect when you must report GST.


Businesses with an aggregated turnover (your business's turnover and the turnover of closely associated entities) of less than $10 million, or who use cash accounting for income tax, can use either method. Most larger businesses must use the non-cash method.


Businesses using cash, accounting or simplified accounting methods are still eligible for Simpler BAS reporting if their GST turnover is less than $10 million.


Accounting for GST on a cash basis

Businesses with an aggregated turnover of less than $10 million can choose to account for their GST using the cash accounting method.


Accounting on a cash basis means you account for GST on the business activity statement that covers the period in which you receive or make payment for your sales and purchases.


The advantages of the cash accounting method are that:

  • the money flowing through your business is better aligned with your activity statement liabilities, so it's easier to manage your cash flow

  • it's suited to smaller businesses that handle cash transactions.

You can use the cash accounting method if any of the following applies:

  • you are a small business entity – that is, an individual, partnership, trust or company with an aggregated turnover of less than $10 million

  • you are not carrying on a business, but your enterprise's GST turnover is $2 million or less

  • you account for income tax on a cash basis

  • you run a kind of enterprise we have agreed can account for GST on a cash basis regardless of your GST turnover, that is

    • a government school

    • an endorsed charitable institution or trustee of an endorsed charitable fund

    • a gift-deductible entity (unless it operates a fund, authority or institution that can receive tax-deductible gifts or contributions).

If you do not fit into any of the above categories, you can ask to be allowed to account for GST on a cash basis.


Sales (cash basis)

You account for the GST payable on the sales you make in the reporting period in which you receive payment for them.


If you receive only part payment for a sale in a reporting period, you only account for the GST in the part of the payment you received.


Purchases (cash basis)

You account for GST credits on your purchases in the reporting period in which payment is made. You must have a tax invoice before you can claim a GST credit, except for purchases costing $82.50 or less.


It is to your advantage to claim your GST credits in the reporting period in which you make the purchases they relate to, but you are not obliged to. You have four years to claim credits.

If you pay only part of the cost of a business purchase in a reporting period, you claim only the GST credit for the part of the cost you paid.


Accounting for GST on a non-cash basis

Most larger businesses must use the non-cash accounting method. Small businesses can choose to use either the cash method or the non-cash method.


Using the non-cash method means you account for GST on the business activity statement that covers the period in which you either:

  • received any payment or you have issued the tax invoice before receiving payment (for a sale)

  • received the invoice from your supplier before making the payment, or made any payment for a purchase.

This method is better suited to businesses that are not paid immediately and is:

  • a way to track your true financial position – what is owed and what you owe

  • helpful if you are dealing with multiple contracts and large amounts of money.

Non-cash accounting can be more complicated than cash accounting and you may need assistance from your registered tax or BAS agent.


Sales (non-cash basis)

You account for the GST payable on the sales you make in the reporting period in which you issue a tax invoice or receive full or part payment, whichever happens first.


This means that if you receive a payment before issuing the tax invoice, you must include the GST amount in the reporting period in which the payment happened, even if it is not the period you issue the invoice.


Purchases (non-cash basis)

You must have a tax invoice for a purchase before you can claim a GST credit.

It is to your advantage to claim your GST credits in the reporting period in which you either receive the tax invoice from your supplier or make some payment (whichever comes first) – but you are not obliged to. You have four years to claim credits.


For more information, visit the ATO's website

 

Philip Seigel CPA FFIN, Comdex Training Centre 2022

See all our Accounting & Bookkeeping articles here


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