Cash vs Accrual Accounting 101 | Learn Their Difference

Cash vs Accrual Accounting 101 Learn Their Difference

Distinguishing between cash vs accrual accounting methods is pivotal for businesses seeking clarity in their financial reporting.

Cash vs Accrual Accounting - What's the difference?

There are two methods of calculating the amounts stated in business financial reports, and the difference is all in the timing.

Small businesses often use the cash basis for the BAS and accrual for income tax returns. We can help you decide what's right for you.

Cash accounting

Cash reporting – income is recorded when cash is received in your bank, and expenses are recorded when money is paid out of your bank.

In cash reporting, the income and expenses are reported in the financial period that the cash transaction occurred.

Most small businesses report on a cash basis (although they can opt for accruals), but those with a turnover of more than $10 million must report on an accruals basis. Businesses that get paid immediately may find cash flow easier to manage on a cash basis.

Cash reporting is generally simpler and an easy option for the BAS, although it's not always as accurate as the accrual system is.

Accrual accounting

Accrual reporting – income is recorded when a customer is invoiced, and expenses are recorded when suppliers issue bills.

In accrual reporting, the income and expenses are reported in the financial period that the transaction was created, regardless of whether a payment was received or made.

Businesses that don’t get paid immediately may have a more accurate picture of their financial position using an accrual basis, although it requires more detailed bookkeeping. While cash reporting gives a short-term picture of your accounts, accrual reporting gives a longer-term view and is more accurate for planning and decision making.

BAS and Tax Returns

Many small businesses are registered for cash reporting for the business activity statement, but the tax agent generally reports the income tax return on an accrual basis. The accrual system gives a more accurate financial picture for income tax calculation.

Key takeways and how we can help

In summary, while cash accounting emphasizes immediate cash movements, accrual accounting considers the broader financial landscape by recognizing revenues and expenses when they are earned or incurred. The choice between these accounting methods often depends on the size, complexity, and nature of the business, with many larger enterprises opting for accrual accounting for its comprehensive financial reporting capabilities. Understanding the nuances of each approach is crucial for businesses to make informed decisions regarding their financial management practices.

Sometimes it isn't always clear! We're here to help make it simpler, so get in touch if you'd like to understand more about your financial reporting for BAS and tax.


Related Links:

Cash and accrual accounting | acnc.gov.au
Choose between cash and accrual accounting | business.gov.au

Acro Accounting & Financial Planning (AAFP) offers a one stop solution right from accounting, taxation, financial planning to other business advisory services. As Certified Practicing Accountants (CPA’s) and professional tax advisors, we pride ourselves on being experts with the latest developments relating to business and taxation. We as professional public practice firm, provide high quality taxation and business advice to our clients through a personalised service at competitive rates.

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