What Is an Accounting Method? Cash vs Accrual in Australia

Your accounting method determines when income and expenses are recorded in your books. In Australia, the two main methods are:

• Cash accounting — record income/expenses when money changes hands
• Accrual accounting — record income/expenses when they’re earned or incurred

The ATO allows most businesses to choose their method — but the choice impacts tax timing, cash flow, and reporting obligations.

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Cash vs Accrual Accounting

Feature	Cash Method	Accrual Method
Income recorded	When received	When invoiced (earned)
Expenses recorded	When paid	When billed (incurred)
Common for	Small businesses, sole traders	Larger or growing businesses
Reporting	Reflects cash flow	Reflects financial position
ATO BAS/GST treatment	Simpler, based on payments received/paid	More complex, based on invoices

Which Method Should You Use?

Cash Accounting:

• Easier to manage
• Useful for businesses with low inventory
• Ideal for sole traders or small operators

Accrual Accounting:

• Gives a clearer picture of profits
• Essential for larger businesses or those with credit terms
• Helps manage accounts receivable/payable accurately

ATO Rules & GST Considerations

• Businesses with less than $10 million turnover can generally choose either method
• Your BAS (Business Activity Statement) must match your chosen method
• For GST purposes, the method affects when you claim credits and report sales

If you want to change methods, you must inform the ATO and update your accounting system accordingly.

Impact on Tax & Reporting

• Accrual may lead to higher taxable income in some years (income earned but not received)
• Cash method helps defer tax but may give less financial insight
• Your choice also affects:
  • Timing of deductions
  • Bank loan applications
  • Business valuations

How Ozobooks Helps

• Advises on the best method based on your industry and size
• Sets up your accounting system accordingly (e.g., Xero, MYOB)
• Ensures GST and BAS reporting matches your selected method
• Supports method changeover if required

FAQ

Q1: Can I change my accounting method later?
Yes, but you must notify the ATO and ensure consistent treatment in your books.

Q2: Is one method better for saving tax?
Not always. Cash may delay income recognition, but accrual gives better financial clarity — especially for growing businesses.

Q3: Do I need an accountant to decide this?
It’s highly recommended. The wrong choice can affect tax, cash flow, and compliance.

Q4: Is the method the same for tax and GST?
Usually, yes — but it’s possible to use different methods for different reporting needs (with approval).