Cash vs Accrual Accounting: Which Is Right for You?

Cash accounting records income when you receive payment and expenses when you pay them. Accrual accounting records income when you earn it and expenses when you incur them, regardless of when money changes hands. For GST purposes, Australian businesses with aggregated turnover under $10 million can choose either method. The choice affects when you report GST on your BAS, how your profit and loss statement reads, and how much cash you need on hand at quarter end

What is cash basis accounting?

Cash basis accounting records transactions when money actually moves. You invoice a customer on 15 June but they pay on 10 July - under cash accounting, that income exists in July, not June. You receive a supplier invoice in March but pay it in April - the expense hits April

This method gives you a direct line of sight to your bank balance. What's on your profit and loss statement closely matches what's in your account, because nothing gets recorded until money moves. For small businesses where cashflow is tight and payment cycles are short, that simplicity has real value

The trade-off is that cash accounting doesn't show you what's coming. You can't see the $30,000 in outstanding invoices your customers owe you, or the $15,000 in supplier bills sitting unpaid. Your P&L reflects the past, not the current financial position of the business

What is accrual accounting?

Accrual accounting records transactions when the economic event happens, not when cash moves. Issue an invoice on 15 June and that revenue is recognised in June, whether the customer pays in July or never. Receive a supplier bill in March and it's an expense in March, even if you don't pay it until next quarter

This method gives you a more accurate picture of business performance over any given period. Revenue is matched to the expenses that generated it, which is why accrual accounting is the basis for profit and loss statements and balance sheets in their standard form

The trade-off is that profit on paper doesn't mean cash in the bank. We regularly see businesses with a strong accrual P&L and an empty bank account, because $80,000 in revenue is sitting in accounts receivable and won't convert to cash for another 30-60 days. If you're using accrual accounting, you need to monitor your cash flow statement alongside your P&L or you're flying blind

How cash and accrual accounting affect your BAS

This is where the choice has direct financial consequences. Your GST reporting method determines when you owe the ATO money

Under cash basis GST, you report GST on sales when your customer pays you, and claim GST credits on purchases when you pay your supplier. If a customer hasn't paid a $11,000 invoice by the end of the quarter, the $1,000 GST isn't reported on that BAS. It goes on the next one, after payment arrives. This keeps your BAS payments aligned with actual cash received

Under accrual basis GST (the ATO calls this the "non-cash" method), you report GST when you issue or receive an invoice, regardless of payment. That $11,000 invoice goes on this quarter's BAS even if the customer hasn't paid. You owe the ATO $1,000 from money you haven't collected yet. On the flip side, you can claim GST credits on supplier invoices before you've paid them

For businesses with long payment terms or slow-paying customers, the cashflow difference between these two methods can be significant. We've seen businesses switch from accrual to cash GST reporting and free up $10,000-$20,000 in working capital just from the timing shift

Who can use cash accounting for GST?

The ATO allows cash basis GST reporting if your business has an aggregated turnover of less than $10 million. That covers the vast majority of Australian small and medium businesses. Above $10 million, you must use the accrual (non-cash) method

You can also use cash reporting if you're not carrying on a business but your GST turnover is $2 million or less, or if you already use cash accounting for income tax purposes

Can you use different methods for GST and income tax?

Yes, and many businesses do. It's perfectly common to use cash accounting for BAS (GST reporting) and accrual accounting for your annual income tax return and management reporting. The ATO doesn't require you to use the same method for both

The most common combination we see across our client base is cash basis for GST, accrual basis for the P&L and tax return. That gives businesses the cashflow advantage of paying GST only when they've been paid, while still getting accurate financial statements that match revenue to the period it was earned

The catch is that your bookkeeper needs to manage the difference. Xero handles this well - you can set your GST to report on a cash basis while running your financial reports on accrual. But if the settings aren't configured correctly from the start, the BAS figures won't reconcile cleanly, and that's one of the most common issues we fix during onboarding

How to choose: cash or accrual

There's no universally right answer. It depends on how your business operates

If your business earns income primarily from personal services and skills (consulting, freelancing, contracting), cash basis generally fits. If your income comes from a business structure with stock, debtors, and longer billing cycles, accrual gives you a clearer picture. ATO ruling TR 98/1 provides guidance on which method suits which business type

Switching between cash and accrual

You can switch, but timing matters. For GST, you update your method through the ATO and align the change to the start of a tax period. For income tax, you adopt the most appropriate method for your circumstances

The risk with switching is double-counting or missing transactions in the transition period. If you were on cash basis and switch to accrual, every unpaid invoice that was already in your system but not yet reported needs to be captured. Every unpaid supplier bill needs to be included. Get this wrong and your first BAS under the new method will be inaccurate

Talk to your bookkeeping team or BAS agent before switching. They can manage the transition in Xero so nothing falls through the cracks

How Xero handles cash and accrual accounting

Xero records all transactions on an accrual basis by default. This means invoices and bills are recorded when created, not when paid. Your standard P&L and balance sheet in Xero are accrual reports

For GST, Xero lets you set your reporting basis in the Financial Settings. If you select "Cash," Xero calculates your BAS based on payments received and made during the period rather than invoices issued. This setting only affects BAS reporting, not your standard financial statements

You can also run any report in Xero on a cash basis by selecting "Cash" under Accounting Basis in the report options. This is useful for comparing how your P&L looks under each method without changing your GST reporting settings

GST thresholds and accounting method requirements referenced in this article are sourced from the Australian Taxation Office, current as at March 2026