Cash vs Accrual Accounting in Australia: Which to Use

Cash vs accrual accounting: the short answer

Cash accounting records income when the money lands in your account and an expense when you pay it. Accrual accounting (the ATO calls it the accruals or earnings basis) records income when you earn it and an expense when you incur it, regardless of when the cash moves. An invoice you raise on 25 June but are paid for on 10 July counts this financial year under accruals and next financial year under cash.

In Australia you make this choice twice: once for income tax and once for GST. This guide explains how each method works, who can use which, how the two interact, and how to pick the one that suits your business.

How each method decides when money counts

The difference is timing. Both methods record the same total income and the same total expenses over the life of a business; they disagree about which period each transaction falls in.

On a cash basis, the trigger is the payment. You count a sale in the period you receive the money, and a purchase in the period you pay for it. Money owed to you that has not arrived does not show up yet, and a bill you have received but not paid does not reduce your profit yet.

On an accruals basis, the trigger is the transaction. You count a sale when you earn it, which the ATO treats as the point a recoverable debt is created, usually when you issue the invoice. You count a purchase when you are billed for it. The cash can arrive weeks later and it changes nothing about which period the income or expense belongs to.

The ATO describes income under the receipts method as derived when it is received, and income under the earnings method as derived when it is earned. The same split applies to the expense side.

A worked example: one invoice, two methods

Mia is a sole trader who does consulting work and is registered for GST. On 25 June she finishes a job and issues a tax invoice for $5,500 including GST. The client pays her on 10 July, which is in the next financial year and the next BAS quarter.

The GST on that sale is $5,500 ÷ 11 = $500, because GST on a GST-inclusive figure is one-eleventh, not one-tenth. Under accruals, Mia reports that $500 on her June-quarter BAS and pays it to the ATO before the client has paid her. Under cash, the $500 is not due until the September-quarter BAS, after the money is in. That timing gap is the practical reason many small service businesses prefer cash accounting: you are not funding the ATO out of pocket while you wait to be paid.

Who can use cash accounting

For GST, eligibility turns on size, not on what you do. You can account for GST on a cash basis if your aggregated turnover is less than $10 million, or if you already account for income tax on a cash basis. That covers almost every sole trader and small business. A business at or above $10 million generally must use the non-cash (accruals) method, and would need the ATO's permission to use cash. A separate narrow exception lets a few agreed enterprise types use cash regardless of turnover, but that does not apply to ordinary businesses.

For income tax, the test is different. The ATO does not set a turnover cut-off; it asks which method gives a substantially correct reflection of your income. Its guidance, drawn from Taxation Ruling TR 98/1, is that the cash basis is appropriate mainly where your business income is principally a result of your own personal services, such as a consultant, a tradesperson, or a professional billing for their time. The accruals basis is generally the appropriate method for a business that trades stock, manufactures, or has formal procedures for extending credit and collecting debts. A shop that carries inventory or a business that invoices on 30-day terms is usually expected to use accruals, because cash accounting would not reflect its real position.

Note that the $75,000 figure you may have in mind is the GST registration threshold, not an accounting-method test. Registration decides whether you charge GST at all; the method decides the timing once you do.

Cash or accruals: how to choose

For a GST-registered sole trader under $10 million turnover, you are allowed to use either method, so the choice comes down to how your business runs.

• Cash suits you if you are paid at or near the time you do the work, carry little or no stock, and want your GST to track your bank account. It is simpler to run from a bank feed or statement, and it keeps you from paying GST on money you have not collected.
• Accruals suit you if you invoice on terms and wait to be paid, carry inventory, or want your profit and loss statement to show what you have earned and committed to in a period rather than only what has cleared the bank. For many trading businesses it is also the method the ATO's appropriateness test points to.

You can use the cash method for GST and still prepare management accounts on an accruals view, or the reverse. Keeping the two aligned is simpler, but they are separate decisions. Whichever you choose, the ATO expects you to apply it consistently and only change when it is no longer appropriate.

Can you switch methods, and how

You can change methods, but not casually mid-period. A switch from cash to non-cash for GST can only take effect from the first day of a tax period, and when you switch you have to account for any earlier sales and purchases you have not yet reported under the old method, so nothing falls through the gap. For income tax, you are expected to keep using a method until it stops being appropriate for your business, for example because you have grown from a one-person service business into one that carries stock and offers credit.

The ATO has also said it is moving some businesses onto the correct GST reporting and accounting methods from 1 July 2026 where they exceeded a threshold and did not update, so it is worth checking that the method you are on still matches your size.

Common misconceptions

"I'll just use cash because it's simpler." For GST under $10 million you can, but for income tax the ATO applies the appropriateness test from TR 98/1. If your business trades stock or runs on credit terms, the accruals basis is generally the method it expects, and cash accounting could be challenged as not giving a correct reflection of your income.

"My income tax method and my GST method have to match." They do not. They are two separate choices. Many small businesses align them because it is easier to run one set of books, but you can account for GST on a cash basis while viewing your income tax position on another footing, within the eligibility rules for each.

"Accrual means paying tax on money I haven't received." On the accruals basis you do report income when you earn it, before the cash arrives, and the same is true of the GST on that sale. That is exactly why the ATO limits cash accounting for income tax to businesses whose income is principally from their own personal services, and why accruals is the expected method for businesses that extend credit.

How SparkReceipt supports either method

Both methods live or die on the quality of your records: the dates, the amounts, and the GST on every sale and purchase. SparkReceipt reads a photographed or emailed receipt and pulls out the vendor, date, total and GST amount, applying Australian GST treatment, then files each one as a categorised expense with the transaction date attached. It captures your income documents the same way, so each sale and purchase carries the date the timing rules depend on.

When you upload a bank or card statement, SparkReceipt extracts every transaction and matches it to your receipts, which is the view a cash-basis business works from directly. At BAS or tax time you export GST-aware category totals for your own records or your accountant, who applies your chosen method. SparkReceipt does not decide your accounting method for you and it does not lodge your return or BAS; it keeps the dated, GST-coded records that either method runs on. See pricing for plan details, including the free accountant seat.

Frequently asked questions

What is the difference between cash and accrual accounting? 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 the cash moves. Over time both record the same totals; they differ on which period each transaction falls in.

Can a sole trader use cash accounting in Australia? Usually yes. For GST you can use the cash method if your aggregated turnover is under $10 million. For income tax the ATO treats cash as appropriate mainly where your income is principally from your own personal services, which describes most sole traders who are paid for their time.

Is cash or accrual better for a small business? Cash is simpler and keeps your GST in step with your bank balance, which helps cash flow if you are paid when you do the work. Accruals give a truer picture if you invoice on terms or carry stock, and the ATO generally expects trading businesses to use it.

Can I use different methods for income tax and GST? Yes. They are separate choices with separate eligibility rules. Aligning them is simpler to run, but it is not required.

Does the $75,000 threshold decide my accounting method? No. The $75,000 figure is the GST registration threshold. Your accounting method is a separate question, decided by the $10 million aggregated-turnover test for GST and the appropriateness test for income tax.

Can I switch from cash to accrual? Yes, but a GST switch takes effect only from the first day of a tax period, and you must account for earlier sales and purchases you have not yet reported. For income tax you keep a method until it is no longer appropriate for your business.

Key takeaways

• Cash counts income and expenses when the money moves; accrual counts them when you earn or incur them. The totals match over time; only the timing differs.
• Australian businesses choose a method twice: once for income tax and once for GST, under separate rules.
• For GST, you can use cash if your aggregated turnover is under $10 million or you already use cash for income tax; larger businesses generally must use non-cash.
• For income tax, the ATO points to cash where income is principally from your personal services and accruals for trading, manufacturing, or credit-term businesses.
• A $5,500 invoice carries $500 of GST; on accruals that falls due before the client pays you, which is the cash-flow case for the cash method.