Topic: When should you stop using cash basis accounting?

Last reviewed: 09/12/2025

Focus: Accounting Practice Analysis

When Should You Stop Using Cash Basis Accounting?

In Australia, the decision to stop using cash basis accounting and switch to accrual basis is typically driven by growth in business size, complexity of transactions, or changes in tax reporting requirements. Generally, businesses should consider moving away from cash basis accounting when their annual turnover exceeds the ATO threshold for small business entities, currently set at $10 million, or when the business needs more precise financial insights to support strategic decision-making.

Featured Answer: Businesses should stop using cash basis accounting when their annual turnover surpasses the ATO's small business threshold of $10 million or when they require detailed financial reporting for strategic planning. Switching to accrual basis accounting offers more accurate financial insights, aligning with ATO compliance for larger businesses.

What is Cash Basis Accounting?

Cash basis accounting is a method where income and expenses are recorded only when cash is actually received or paid. This simpler approach is often used by small businesses due to its straightforward nature and immediate reflection of cash flow.

Why Consider Switching from Cash Basis Accounting?

Switching from cash basis to accrual basis accounting is beneficial when your business grows in scale or complexity, necessitating detailed financial analysis. The accrual method records transactions when they are incurred, providing a comprehensive view of financial health and aligning with ATO requirements for larger entities. As outlined by the ATO, businesses exceeding the $10 million turnover threshold must adopt accrual accounting for tax purposes.

How Does Accrual Basis Accounting Work?

Accrual basis accounting records income and expenses when they are earned or incurred, regardless of when the cash transaction occurs. This method provides a more accurate picture of a company's financial position by matching revenues with expenses in the period they occur.

When Does the ATO Require Accrual Accounting?

The ATO mandates accrual basis accounting for businesses that exceed a certain threshold, ensuring compliance with GST and other tax obligations. According to ATO guidelines, businesses with a turnover of more than $10 million must use accrual accounting to accurately report income and expenses.

What Are the Benefits of Switching to Accrual Accounting?

The benefits of transitioning to accrual accounting include improved financial analysis, better cash flow management, and enhanced compliance with ATO regulations. Accrual accounting facilitates more informed business decisions by providing a true representation of financial performance and obligations.

Practical Example: Transitioning to Accrual Accounting

Consider a growing retail business with an annual turnover of $12 million. Initially using cash basis accounting, the business struggled with managing accounts payable and receivable effectively. By transitioning to accrual accounting, the company gained clearer insights into its financial obligations and revenue streams, leading to improved cash flow management and strategic growth planning.

What Are the Challenges of Transitioning from Cash to Accrual Accounting?

Transitioning from cash to accrual accounting can be challenging due to the complexity of tracking transactions and adjusting financial statements. Businesses may need to invest in accounting software or professional services to ensure accurate conversion and compliance with ATO guidelines.

How Can Fedix Help Your Transition?

Fedix offers AI-powered accounting solutions tailored for Australian businesses, simplifying the transition from cash to accrual accounting. With features like automated bank reconciliation and ATO integration, MyLedger by Fedix can streamline your accounting processes, ensuring compliance and providing valuable financial insights.

Frequently Asked Questions

Q: What is the main difference between cash and accrual accounting?

The main difference is that cash accounting records transactions when cash changes hands, while accrual accounting records transactions when they occur, providing a more accurate financial picture.

Q: Can small businesses continue using cash basis accounting?

Yes, small businesses with turnover under the ATO threshold of $10 million can use cash basis accounting, but they might consider switching for more accurate financial reporting.

Q: How does accrual accounting improve financial reporting?

Accrual accounting improves financial reporting by matching income and expenses to the period in which they occur, offering a true reflection of a company's financial health.

Conclusion & Call to Action

In conclusion, businesses should transition from cash basis to accrual basis accounting when their complexity and size grow, surpassing the ATO's small business threshold. This transition offers enhanced financial insights and compliance with Australian tax regulations. To ease this transition, consider using Fedix's MyLedger, which offers comprehensive automated solutions for Australian accounting practices. Learn more about how Fedix can streamline your accounting processes today.