Cash vs Accrual Accounting: One Business, Two Very Different Stories

The Case Study Quarter at a Glance

Meet a hypothetical Parramatta electrician. We invented the figures, which cover April to June 2026 and include GST at 10%. Every bill is a valid tax invoice.

How Cash vs Accrual Accounting Records the Same Jobs

The work, the customers and the bank account stay the same. Only the timing rule changes:

• Cash method: income covers Job A and the paid half of Job C, a total of $40,000 excluding GST. Expenses reach $12,500.
• Accrual method: the books count all three jobs ($90,000) and all three bills ($30,000), whether or not any money moved.
• Part-paid work: cash splits Job C and the hire bill by what changed hands, while accrual takes the full invoice at once.

Profit, GST and Cash Under Cash vs Accrual Accounting

Net cash: $44,000 received less $13,750 paid. Debtors and creditors include GST.

Accrual profit sits $32,500 higher. That gap equals the $50,000 still owed by customers less the $17,500 still owed to suppliers (both excluding GST). The accrual BAS also asks for $3,250 more GST, even though Job B has not paid a cent.

Which Story Should You Trust?

Each method answers a different question. Cash shows what you can spend this week. Accrual, by contrast, shows what the business actually earned, which matters when you price jobs, chase debtors or talk to a lender.

Many owners therefore lodge GST on a cash basis but review accrual reports monthly. That habit sits at the heart of good management accounting because it flags slow payers early.

Part-paid work widens the gap. Builders with progress claims and retentions often carry large debtors, so tidy ledgers matter in construction bookkeeping more than almost anywhere.

Who Can Use Cash vs Accrual Accounting in Australia

For GST, the ATO sets a clear line. Under its guidance on choosing an accounting method, a small business entity with aggregated turnover under $10 million may use either method. Most larger businesses must use the non-cash (accrual) method.

Income tax follows a different test. No turnover threshold applies. Instead, Taxation Ruling TR 98/1 looks for the method that best reflects your income. The earnings (accrual) method generally suits trading and manufacturing businesses. Meanwhile, the receipts (cash) method can suit a small professional practice where the owner personally earns the income.

Hospitality shows the point. A cafe with stock, staff and 30-day supplier terms needs accrual reports to see true food costs, so accrual-ready ledgers belong in any solid restaurant bookkeeping routine.

When Switching From Cash to Accrual Makes Sense

A move to accrual usually makes sense when one of these triggers appears:

1. Aggregated turnover approaches $10 million, where the non-cash GST method applies.
2. You invoice on 30 to 60-day terms and debtors keep growing.
3. You carry stock, bill progress claims or rely on staff to earn income.
4. A lender or buyer asks for accrual financial statements.

Timing matters too. The ATO only lets a change to non-cash GST start on the first day of a tax period. That first BAS picks up GST on unpaid and part-paid sales, plus credits you have not yet claimed. Our electrician would add $5,000 of GST and claim $1,750 of credits.

Smaller trade businesses often stay on cash because it matches the bank account. Good bookkeeping for tradies still keeps invoices and bills current in Xero, so both reports stay one click away.

Before you switch, check turnover, income tax position and debtors with a registered tax agent. Our accounting services can test both methods against your numbers before the next BAS.

Cash and Accrual Reporting by Industry

The right method depends on how your industry bills, gets paid and holds stock. Choose your sector to see how we set up reporting for it.

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This guide contains general information only and does not take your personal circumstances into account. The case study uses hypothetical figures. Speak with a registered tax agent before acting on it.