Invoices sent but not yet paid
Bills received but not yet paid
Cash basis results in lower or equal tax this period.
Tax difference: $2,240.00 -- you save by using the cash method this period.
Cash Basis Tax
$16,388.00
on profit of $80,000.00
Accrual Basis Tax
$18,628.00
on profit of $87,000.00
You Save
$2,240.00
using cash basis
Cash Basis
$80,000.00
Accrual Basis
$87,000.00
Cash vs accrual accounting
Under cash accounting, income and expenses are recognised when money changes hands. Under accrual accounting, income is recognised when invoiced and expenses when incurred, regardless of when cash is received or paid. The accrual method includes accounts receivable (money owed to you) and accounts payable (money you owe).
Small business concession
Businesses with aggregated turnover under $10 million can choose to report on a cash basis for income tax purposes. This is known as the small business income tax concession and can provide a timing advantage for tax payments.
Which method is better?
If you have large accounts receivable (money owed to you), cash basis will generally result in lower taxable income. If you have large accounts payable (bills you owe), accrual basis may be more advantageous. Over time, both methods recognise the same total income and expenses -- the difference is in timing.
Note: The tax impact shown is for one period. Over time, both methods will recognise the same total income and expenses. The difference is in timing. Consult your accountant for advice specific to your situation.
How the two main accounting methods affect your tax, BAS reporting, and business decisions
What is the difference between cash and accrual accounting?
Cash accounting records income when you actually receive the money and expenses when you actually pay them. Accrual accounting records income when you earn it (for example, when you send an invoice) and expenses when you incur them, regardless of when cash changes hands. If you send a A$5,000 invoice in June but get paid in July, cash basis counts it in July while accrual basis counts it in June.
Which method should a small business use?
Most sole traders and small businesses with turnover under A$10 million can choose either method. Cash basis is simpler and suits businesses that deal mostly in cash or have straightforward transactions. Accrual basis gives a more accurate picture of your financial position and is better for businesses that carry stock or have lots of debtors. Companies with turnover over A$10 million must use accrual accounting.
How does each method affect your tax bill?
With cash accounting, you only pay tax on money you have actually received. If a client owes you A$10,000 at 30 June but has not paid yet, that amount is not taxable until the next year. With accrual accounting, you would include that A$10,000 in this year's income even though you have not received it yet. Cash basis can help with cash flow by deferring tax on unpaid invoices.
How does each method affect BAS reporting?
If you report GST on a cash basis, you only include GST on sales you have received payment for and GST credits on purchases you have paid for. On an accrual basis, you report GST when you issue or receive an invoice, even if no money has changed hands. For example, if you issued A$11,000 in invoices (including A$1,000 GST) but only got paid A$5,500, cash basis BAS reports A$500 GST, while accrual reports A$1,000.
Can you switch between cash and accrual?
Yes, but you need to be careful. You must account for any income or expenses that could be counted twice or missed completely during the switch. The ATO requires you to make adjustments in the year you change methods. It is a good idea to switch at the start of a financial year (1 July) to keep things clean. Talk to your accountant before switching, as it can have unexpected tax consequences.
What are the pros and cons of cash accounting?
Pros: simpler to manage, you only pay tax on money received, better cash flow visibility, easier BAS preparation. Cons: does not show money owed to you or by you, can give a misleading picture of profitability, harder to track outstanding invoices, not suitable for larger or more complex businesses. Most sole traders and small service businesses prefer cash basis for its simplicity.
What are the pros and cons of accrual accounting?
Pros: gives a true picture of your financial position, tracks receivables and payables, better for planning and budgeting, required for businesses with turnover over A$10 million. Cons: more complex to manage, you may pay tax on income you have not yet received, requires more bookkeeping, BAS preparation is more involved. Businesses carrying stock or with credit terms typically need accrual accounting.
ATO-Aligned: Based on 2024-25 ATO rates and thresholds. For personal advice, speak to a qualified tax agent.
Disclaimer: This calculator provides estimates based on current ATO rates and thresholds for the 2024–25 financial year. It does not constitute professional tax, financial, or legal advice. Your actual liability may differ depending on your individual circumstances. Always consult a qualified tax agent before making financial decisions. Read our terms
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