Topic: Should your business use cash or accrual basis?

Last reviewed: 09/12/2025

Focus: Accounting Practice Analysis

Should Your Business Use Cash or Accrual Basis?

Choosing between cash and accrual accounting can significantly impact how your business reports income and expenses. In Australia, the choice largely depends on your business's size, complexity, and statutory requirements. The cash basis is simpler and records transactions when cash changes hands, making it ideal for small businesses with straightforward operations. The accrual basis, conversely, records income and expenses when they are incurred, providing a more accurate financial picture, particularly useful for larger companies with complex financial transactions.

Featured Answer: The decision between cash and accrual basis accounting depends on your business's size and complexity. Small businesses often benefit from the simplicity of the cash basis, while larger businesses may require the detailed financial insights provided by the accrual basis. Consider your business needs and consult with an accounting professional to make an informed choice.

What is Cash Basis Accounting?

Cash basis accounting records transactions only when cash is exchanged. This method is straightforward and provides a clear picture of cash flow, but it may not accurately reflect the financial position of your business at any given time. According to the Australian Taxation Office (ATO), businesses with a turnover of less than $10 million can use the cash basis for their GST reporting. This simplicity makes it an attractive option for small businesses or sole traders, as it aligns closely with actual bank balances.

Practical Example:

Consider a local café that sells coffee and pastries. Under the cash basis, the café records sales when customers pay. Similarly, expenses like purchasing coffee beans are recorded when payment is made. This method ensures that the business owner has a clear view of cash availability at any point.

How Does Accrual Basis Accounting Work?

Accrual basis accounting records income and expenses when they are earned or incurred, regardless of cash exchange. It provides a more comprehensive view of financial health by matching revenues with associated expenses in the same period. This method is typically required by the ATO for businesses with a turnover exceeding $10 million. Accrual accounting offers insights into future cash flows, helping businesses plan and manage financial obligations more effectively.

Practical Example:

A manufacturing firm supplies products to retailers. Under the accrual basis, revenue is recorded when invoices are issued, not when payments are received. Similarly, expenses are recognized when materials are ordered, not when they are paid for. This approach provides a clearer picture of profitability and financial status, crucial for stakeholders and investors.

What Are the Benefits and Drawbacks of Each Method?

Simplicity and ease of use
Immediate reflection of cash flow
Lower accounting costs

May not accurately reflect financial health
Limited insight into future financial obligations

Provides a comprehensive financial view
Better matches income with expenses
Essential for managing complex business operations

More complex and costly to maintain
Requires more detailed financial tracking

What Does the ATO Say About Choosing an Accounting Method?

According to ATO guidelines, the choice between cash and accrual accounting should align with the business's turnover and complexity. The ATO mandates the accrual basis for large businesses and provides flexibility for smaller entities to choose the cash basis if it suits their operations. Tax Ruling TR 98/1 outlines the principles for determining which method to use, emphasizing that the chosen method should accurately reflect the business's income.

Frequently Asked Questions

Q: Can a business switch from cash to accrual accounting?

A: Yes, a business can switch methods, but it must notify the ATO and may need to adjust previous financial statements for consistency.

Q: How does the choice of accounting method affect tax reporting?

A: The accounting method affects when income and expenses are reported, impacting the timing of tax obligations. The accrual basis often results in earlier income recognition.

Q: Is the cash basis suitable for all small businesses?

A: While the cash basis is suitable for many small businesses due to its simplicity, those with complex financial transactions or significant inventory may benefit from the accrual basis.

Q: What are the implications of using the accrual basis for GST reporting?

A: Under the accrual basis, GST is reported when invoices are issued, which may affect cash flow if payments are delayed.

Q: How does MyLedger support businesses in managing their accounting method?

A: MyLedger offers tools for both cash and accrual accounting, providing automated reconciliation and ATO integration to simplify compliance and reporting.

Conclusion & CTA

In conclusion, the choice between cash and accrual basis accounting should be guided by your business's size, complexity, and financial reporting needs. Consulting with an accounting professional can provide valuable insights tailored to your specific circumstances.

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Disclaimer: This content is for informational purposes only and should not be considered as financial advice. Please consult a qualified accountant for advice specific to your business needs.