You’ve heard people talk about cash versus accrual accounting, but what is it all about? And why does accrual get all the glory? We take you through the basics.

 

Difference between cash and accrual accounting

The difference between cash basis and accrual basis accounting comes down to timing. When do you record revenue or expenses? If you do it when you pay or receive money, it’s cash basis accounting. If you do it when you get a bill or raise an invoice, it’s accrual basis accounting.

Accrual accounting is a far more powerful tool for managing a business, but cash accounting has its uses.

What is cash basis accounting?

Businesses that use cash basis accounting recognise income and expenses only when money changes hands. They don’t count sent invoices as income, or bills as expenses – until they’ve been settled.

Despite the name, cash basis accounting has nothing to do with the form of payment you receive. You can be paid electronically and still do cash accounting.

Benefits of cash accounting

  • It’s simple and shows how much money you have on hand.

  • It’s an easier option for calculating GST, though not all businesses are allowed to use it. Check out the ATO website for specifics.

Downsides of cash accounting

  • It’s not accurate  – it could show you as profitable just because you haven’t paid your bills.

  • It’s doesn’t help when you’re making management decisions, as you only have a day-to-day view of finances.

  • Accrual basis accounting allows you to share more meaningful information with business partners and associates.

 

 

Posted by XERO