Cash vs accrual accounting: which is right for you?

Published Monday 20 April 2026

Table of contents

• Difference between cash and accrual accounting
• What is cash basis accounting?
• What is accrual basis accounting?
• Cash vs accrual accounting example
• How to choose between cash and accrual accounting
• Cash vs accrual vs hybrid accounting
• Hybrid methods of accounting
• Making the right accounting choice for your business
• FAQs on cash versus accrual accounting

Key takeaways

• Choose cash accounting if your business has simple transactions and immediate payments with an aggregated turnover under $10 million, as it gives you clear cash flow visibility and simpler bookkeeping.
• Switch to accrual accounting when you send invoices with payment terms of 30–90 days or need accurate performance reporting, as it records income and expenses when they occur and shows your true profitability.
• Use modern accounting software to automate accrual processes and switch between cash and accrual views instantly, so you can track both actual money flow and business performance without extra manual work.
• Talk to your accountant before changing accounting methods to make sure you handle the transition correctly and stay compliant with tax and regulatory requirements.

Key takeaways

• Choose cash accounting if you run a small business with simple transactions and immediate payments. It provides clear cash flow visibility and simpler bookkeeping, but only if your aggregated turnover is less than $10 million.
• Choose accrual accounting when you send invoices with extended payment terms (30–90 days) or need accurate performance reporting for business decisions and financing. It shows true profitability by matching income and expenses to when they actually occur.
• Use modern accounting software to automate accrual processes and switch between cash and accrual views instantly, making it easier to track both actual money flow and how your business performs at the same time.
• Talk to your accountant before switching accounting methods to ensure you handle the transition correctly and maintain compliance with tax and regulatory requirements.

Here's what you need to know about choosing the right accounting method for your business.

Difference between cash and accrual accounting

The key difference is timing.Cash basis accounting records income and expenses only when money changes hands. Accrual basis accounting records transactions when invoices are sent or bills are received, regardless of payment timing.

With cash accounting, you record a sale when the customer pays. With accrual accounting, you record it when you send the invoice.

What is cash basis accounting?

Cash accounting is the simpler of the two methods and works well for businesses with straightforward transactions.

Cash basis accounting records income and expenses only when money changes hands. You record a sale when the customer pays, not when you send the invoice.

This method tracks your actual cash flow and includes all payment forms: cash, cheque, bank transfer or electronic payments.

Benefits of cash accounting

Cash accounting offers these benefits:

• Clear cash visibility: you see exactly how much cash you have available right now
• Simpler GST calculations: you can calculate GST more easily for eligible businesses (check ATO requirements)

Downsides of cash accounting

Cash accounting has these downsides:

• Incomplete profit picture: your reports may show profits even when bills remain unpaid
• Limited performance view: it provides only a day-to-day cash snapshot, not a full picture of business health

What is accrual basis accounting?

Accrual basis accounting records transactions when they happen, not when money changes hands. You record income when you send an invoice and expenses when you receive a bill, even if payment is due in 30 days.

This method shows your true business performance regardless of payment timing.

Benefits of accrual accounting

Accrual accounting offers these benefits:

• Accurate profitability: it shows true profitability and financial health
• Better decision-making: it gives you a complete picture for confident strategic choices
• Improved financing access: it helps you secure better loan terms, as banks prefer accrual reports for applications

Downsides of accrual accounting

Accrual accounting has these downsides:

• More tracking required: you need to monitor invoices and bills, not just your bank balance, since you must have a tax invoice before you can claim most GST credits
• Tax timing mismatch: you may pay tax on income before receiving payment (this is refundable if a customer defaults)

Understanding the difference is easier with a practical example.

Cash vs accrual accounting example

Here's how the same transaction looks under each method.

Scenario: You complete a $5,000 consulting project in June and send an invoice. The client pays in July.

Cash accounting:

• June: no income recorded (no payment received)
• July: $5,000 income recorded (payment received)

Accrual accounting:

• June: $5,000 income recorded (invoice sent)
• July: no new income recorded (payment clears the outstanding invoice)

The timing difference matters for your financial reports. With cash accounting, June shows no income from this project. With accrual accounting, June reflects the work you completed and the revenue you earned.

Now that you understand how each method works, here's how to decide which one suits your business.

How to choose between cash and accrual accounting

Your choice depends on your business size, complexity and reporting needs.

Choose cash accounting if you:

• run a small business with simple transactions and immediate payments
• want to keep bookkeeping and tax preparation simple
• meet ATO eligibility requirements for aggregated turnover under $10 million
• prioritise clear cash flow visibility over detailed performance analysis

Choose accrual accounting if you:

• send invoices with payment terms of 30, 60 or 90 days (learn more about accounts receivable)
• need accurate performance reporting for business decisions or financing
• manage inventory or complex transactions that span multiple periods
• plan to scale your business or attract investors, as the Corporations Act requires large proprietary companies to prepare formal financial reports using accrual accounting

Consider hybrid accounting if you:

• want accrual reporting for performance insights
• need simpler cash flow tracking for certain tax calculations
• have accounting expertise to manage compliance requirements

Some businesses use a combination of both methods.

Cash vs accrual vs hybrid accounting

Here's how the three approaches compare:

• Accrual accounting tells you if specific months were genuinely profitable
• Cash flow monitoring combines accrual reporting with cash basis tracking to monitor actual money flow alongside business performance
• Technology simplification automates most accrual processes through modern accounting software, reading bills, recording expenses and switching between cash and accrual views instantly

You don't have to choose just one method.

Hybrid methods of accounting

Hybrid accounting combines both methods for different purposes. You might use accrual accounting for business decisions and loan applications, while using cash accounting for certain tax calculations.

This approach offers flexibility with specific compliance requirements to follow. Talk to your accountant to check if hybrid accounting suits your business and meets regulatory requirements.

With the right approach, you can set your business up for success.

Making the right accounting choice for your business

Your accounting method affects everything from daily cash flow to business growth decisions. Cash accounting works well for simple businesses with immediate payments, while accrual accounting provides the detailed insights growing businesses need.

Most successful businesses move to accrual accounting as they grow. For example, professional practices must account for income on an accruals basis once non-principal practitioners equal or outnumber principal practitioners. Modern accounting software makes this transition seamless and automates complex processes that once required manual tracking.

Spend less time on bookkeeping and more time growing your business. Get one month free and see how smart automation handles both cash and accrual accounting.

FAQs on cash versus accrual accounting

Here are answers to some common questions about cash and accrual accounting.

How do I know if I'm currently using cash or accrual accounting?

Check when you record your income and expenses. If you record transactions only when money enters or leaves your bank account, you're using the cash method. If you record income when you send an invoice and expenses when you receive a bill, you're using the accrual method.

Why would I choose cash basis instead of accrual?

Cash basis is simpler to manage and shows exactly how much cash you have on hand. If your GST turnover is under $10 million, you may also be eligible for Simpler BAS reporting when using cash or simplified accounting methods.

When should I use cash basis accounting?

Use cash basis accounting when you run a sole trader or small business with simple transactions and immediate payments. Keep in mind that a sole practitioner must be registered for GST if their projected annual turnover reaches $75,000 in Australia. The ATO allows the cash method if your enterprise's GST turnover is $2 million or less for GST purposes.

Can I switch from one method to another?

Yes, you can switch methods. Follow the relevant rules, especially for tax purposes, to ensure a smooth transition. Speak with your accountant or bookkeeper before making a change to ensure you'll handle the transition correctly and stay compliant.