Business Basics: Cash vs Accruals

New to business and not sure about cash vs accruals accounting? Here’s a quick guide to the pros and cons of each to help you decide which method works best for your business.

 

Cash Accounting

Businesses that use the cash accounting method recognise income and expenses only when money changes hands. In cash accounting:

• when you receive an invoice for something you don’t record the expense in your books until you’ve actually paid the invoice
• when you send an invoice to a customer you don’t record the income in your books until you’ve actually received their payment

Note that cash accounting has nothing to do with the way you receive payments. You can be paid electronically and still use the cash accounting method.

Advantages:

• simple
• an easier option for calculating GST
• gives you a picture of how much money you have in your bank accounts

Disadvantages:

• doesn’t give a true picture of your financial position because it doesn’t show money that is owed to you or that you owe to others

 

Accrual Accounting

If you use the accrual accounting method, you record expenses and sales when they take place rather than when the cash actually changes hands. This way of accounting shows the amounts you owe to people and the amounts owing to you.

For example, if you’re a lawyer and send an invoice for services you’ve provided, you record the sale in your books even though you may not receive payment for 30 days.

Advantages:

• tracks your true financial position
• helpful if you’re dealing with large amounts of money

Disadvantages:

• more complicated than cash accounting
• you may have to pay tax on income before the customer has actually paid you

 

Choosing a Method

If your GST turnover is less than $10 million you can choose either method. Most businesses with a GST turnover over $10m don’t have a choice and will need to use accruals.

To work out which method best suits your business, you’ll need to think about:

• the size of your business
• how complicated your business transactions and processes are
• whether you have the resources to manage accrual accounting
• whether the use of accounting software will make a difference
• what your cashflow looks like

 

Further help

If you’re not sure which method to choose or how to set up your accounting system, feel free to contact Marsh & Partners to discuss the options. You can reach us on (07) 3023 4800 or at mail@marshpartners.com.au.

You can find out more about working with Marsh & Partners here. As your Absolute.Account.Ability partner we’re on a mission to make your business life better. We’ll help you set goals for your business, devise an Action Plan to make them happen and meet with you regularly to ensure you stay on track.

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