Cash vs Accrual Accounting

Cash vs Accrual Accounting

What’s the difference between cash and accrual accounting? You may not have ever heard of it, you may not have ever seen it. But if you have a Business Activity Statement, it may say cash or accrual.

There is a very big difference and it’s not just about GST.

If you prepare your accounts on a cash basis, it means that you only account for money when it hits your bank account. You only account for expenses when you physically pay them.

Whereas an accrual basis of accounting means that we count income when it’s invoiced. Then we count expenses when we’ve got bills. A full system of accounting like Xero if you’re using in its true form, we’re invoicing in  Xero, we’re putting bills in the system, we’re putting credit card accounts in the system, chances are, you’re going to be on an accrual basis.

If you’re just coding the bank statements historically, with what happens, then you’re a cash basis.

The difference between the two for tax is that if you’ve got a business that has more that’s outstanding from people owing you money than what you owe people, you’ll pay more tax because you’re paying tax on the money that you haven’t received yet.

If you operate on a system where you don’t have accounts, or money comes in very quickly, and you’ve got long lead times with your supplier invoices, then an accruals basis is much better, because you get to account for the expenses when you accrue them. If you’re a big business, meaning your turnover is over a million dollars, you don’t have a choice; you have to be on accruals.

From a GST point of view, the results are very similar. If you have more money that’s going out that’s been sitting his bills and what you’ve got coming in then and accruals basis is best for you. Otherwise cash.

The types of businesses that are good for cash are ones like retail shops and some trades, where you do work straight away and you’ve got material bills that you pay at the end of the month. Everybody else, accruals is probably the system for you. And if you do have turnover over a million dollars as I said, you don’t have a choice. That’s cash and accruals in a nutshell.

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