When running a business, it is important to understand when you need to record your income. The two main accounting methods used are cash basis accounting and accruals basis accounting.
The method you use determines when your business income is included in your records and reported for tax purposes.
The Australian Taxation Office (ATO) explains that:
- Under the cash basis, income is reported when you receive the payment, even if the work was completed earlier.
- Under the accruals basis, income is reported when you earn it, even if you have not received payment yet.
You can find more information from the ATO here:
Accounting methods for business income | Australian Taxation Office
What Is Cash Basis Accounting?
Cash basis accounting means you record income when the money actually comes into your bank account.
For example:
You complete a job in June and send your customer an invoice for $7,240. The customer pays the invoice in July.
If you use cash basis accounting, you record the income in July because that is when you received the payment.
Cash basis accounting includes:
✔ Payments received during the financial year
✔ Money that has actually been paid into your account
It does not include:
✘ Work completed where payment has not been received yet
Who Might Use Cash Basis Accounting?
Cash basis accounting is often used by smaller businesses where income mainly comes from the owner's personal work or services.
It can be easier to manage because it follows the actual movement of money in and out of your bank account.
For example, if you are a sole trader providing services and customers usually pay soon after receiving an invoice, cash basis accounting may be easier to maintain.
What Is Accruals Basis Accounting?
Accruals basis accounting means you record income when you earn it, not when you receive the money.
Using the same example:
You complete a job in June and issue an invoice for $7,240. Your customer pays in July.
If you use accruals accounting, you record the income in June because that is when the work was completed.
Accruals basis accounting includes:
✔ Income earned during the financial year
✔ Money owed to you for work already completed
This method gives a clearer picture of your business performance because it matches the income with the period the work was done.
Cash vs Accruals Accounting Example
Imagine you are a carpenter and complete a job in April worth $7,240.
Your customer pays the invoice on 10 July.
If you use cash basis accounting:
The $7,240 is included as income in the financial year when you receive the payment.
If you use accruals basis accounting:
The $7,240 is included as income in the financial year when you completed the work.
The amount is the same, but the timing of when it is recorded is different.
Which Accounting Method Should You Use?
The right method depends on your business and circumstances.
Cash basis accounting may suit businesses that:
- Have fewer transactions
- Receive payments quickly
- Want a simpler way to track income
Accruals basis accounting may suit businesses that:
- Issue invoices to customers
- Have customers who pay at a later date
- Want a better understanding of their business performance
Once you choose an accounting method, you need to use the same method for all transactions within the financial year.
Cash vs Accrual Accounting for GST
It is important not to confuse income accounting methods with GST reporting methods.
The ATO treats these as separate areas. Businesses registered for GST may report GST using either a cash or non-cash method, depending on their circumstances.
Choosing the right method for income and GST reporting can help make sure your BAS and tax reporting are accurate.
More information about GST accounting methods is available on the ATO website:
GST - Goods and Services Tax | Australian Taxation Office
Why Accurate Bookkeeping Matters
Regardless of whether you use cash or accrual accounting, keeping accurate records is essential.
Good bookkeeping helps you:
✔ Know how your business is performing
✔ Keep track of money owed to you
✔ Prepare accurate BAS and tax information
✔ Understand your cash flow
✔ Make better business decisions
The ATO requires businesses to keep records that explain their transactions and support their tax obligations.
You can read more about record keeping requirements here:
Overview of record-keeping rules for business | Australian Taxation Office
Need Help With Your Bookkeeping?
Understanding how your income is recorded is an important part of managing your business finances.
At Sonic Accounts, we help small businesses with:
✔ Bookkeeping
✔ Bank reconciliations
✔ BAS preparation and lodgement
✔ Payroll and STP reporting
✔ Xero and MYOB support
If you need help keeping your accounts organised and up to date, contact Sonic Accounts today.
Cash vs Accrual Accounting Explained