The Difference Between Cash-Based & Accrual Accounting

The difference between cash-based and accrual accounting relates to the difference between business types. Cash-based is a simpler form of accounting for smaller businesses, whilst accrual accounting is more complicated, and better suited to larger companies. The type of accounting you choose affects when you report and pay your GST, and can help you decide what kind of accounting services you need. Read on to learn more about the differences between cash-based and accrual accounting.

Cash-based accounting

Cash-based accounting is most commonly used by businesses with a turnover of less than $2 million a year- mostly sole traders and contractors. The reason why small businesses tend to choose cash based accounting is that this method makes it easier to manage cash flow. With this method, you add GST to the price of your service, and you don’t have to pay that GST to the ATO until your customer pays it to you. This is why they call it paying on a ‘cash-basis’. With cash-based accounting, you pay GST when you lodge your business activity statement quarterly.

Accrual accounting

Accrual accounting is more often used by larger businesses with a turnover of more than $2 million per year. With this method, you pay GST when you send out or receive an invoice, usually before getting paid. This means you have to pay GST even if your customer hasn’t paid you yet. This is why they call it accrual accounting, because you ‘accrue’ these taxes over time. Larger businesses are better equipped to do their accounting this way, as they have enough cash to manage these payments.

Which one should I choose?

If you’re an independent contractor or a sole trader, you’ve most likely got an annual turnover of less than $2million per year. To make your life easier, and reduce the stress on your business, choose cash-based accounting. Simply put, cash based accounting is “dosh in, dosh out”. This method lets you keep track of your income and pay your GST as you go. And because it allows, you pay your taxes once you’ve received them from your clients, so GST is never coming out of your pocket.

For small businesses using cash-based accounting, taxes are a little more straightforward than accrual-based businesses. You don’t need a team of expensive accountants to do your taxes, you only need your BAS and taxes done, and some sound advice on where to take your business. Look to a service like Just Done which does your BAS and quarterly taxes for you, and shows you exactly how much income tax you need to pay at the end of the year. You also get a real person behind the scenes who is managing your account, always on call to give you advice.