If you've just launched your small business, chances are you've already Googled "bookkeeping methods" and stumbled across two big ones: cash accounting and accrual accounting. Sounds technical, right? Don't worry - we'll break it down in plain English so you can figure out which approach keeps your small business finances crystal clear (and keeps the headaches to a minimum).
What's the Difference, Really?
Think of it like this:
Cash Accounting = money in, money out. You record income when it hits your bank account and expenses when you pay them.
Accrual Accounting = you record income when you earn it (even if you haven't been paid yet) and expenses when you owe them.
In short:
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Cash = simple. What's in the bank is what you see and use as the basis of your record keeping.
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Accrual = a bit more complex, but gives a truer picture of your business health. Your record keeping starts when the transaction starts. You get a call and your quote starts the process right through to payment.
Which Method Suits Which Business?
BOTH - it depends what you want.
If you don't care about any information until the $$ hit the bank account, you probably want cash.
If you want to use Quotes, Purchase Orders, and know how long it takes from quote to payment, you want accrual.
In your early days, and if you are small, cash is going to serve you fine - and you can even report your Tax return and BAS on cash.
With accrual, the focus is on the information. If you want systems and good reporting, you will need to invest in accrual. And I mean invest. Good information comes from taking the time to set up trading terms with your clients (and enforcing them).
Even if your BAS is on cash, you can still run an accrual accounting system. So before we talk about BAS and GST, decide on your reporting system first.
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Accruals = better information about your business, but more setup, more systems, and more bookwork.
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Cash = less information, but less work and fewer procedures. Your bank statement might be all of it.
Real-World Example
Cash Method Example:
A landscaper invoices a client $5,000 in June but doesn't get paid until July. Under cash accounting, the income is recorded in July - and as it magically hits the bank, it magically hits your bookkeeping system. Start and end of the transaction is in July.
Accrual Method Example:
A marketing consultant invoices $5,000 in June. The bookkeeping system issues the invoice and we see the income reported at this date. The invoice hangs around until the money hits the bank 32 days later and we record the payment.
So now, our bookkeeping tells two parts of the same story:
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When we earned the money
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When we received the money
See the difference? One tracks cash movement, the other tracks business activity.
What About BAS?
BAS on cash or accrual method is similar - but we can talk about that in another blog. BAS is only in Australia and came long after bookkeeping, so for now, let’s just focus on the record keeping.
If you've started your business, make the decision on cash vs accrual as early as possible - it’ll influence other crucial decisions later on.
👉 Pro tip: Get advice from an accountant or bookkeeper before locking it in. Changing methods later can be messy.
Where Do I Start with Bookkeeping?
If you're setting up small business accounting from scratch in Australia:
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Decide on your method - Cash vs Accrual
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Set up your Chart of Accounts (your categories for income and expenses). Accrual needs a bigger chart.
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Choose bookkeeping software that supports your method.
(Xero, MYOB, and QuickBooks all handle both, but not all subscriptions support invoicing - you may have to pay more to do accrual properly.) -
Keep clean business records from day one.
The business books need to be just about the business. Keep your streaming and dating profiles out of the business accounts - PLEASE.
There are some mental images us bookkeepers just don't need to have... please. -
Don't be afraid to ask for tips or outsource the tricky parts. I even outsource parts of my business. My staff do their own timesheets, and those become the basis for their pay and our invoicing. I don’t do everything, so why are you?
The Bottom Line
When it comes to bookkeeping Australia-style, neither method is “better” across the board.
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Cash accounting keeps things simple.
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Accrual accounting gives service-based businesses a more realistic financial picture.
The trick is choosing the one you understand - the one that gives you useful info without giving you a headache.
👉 Not sure which method fits you? Hit me up - I can help you set it up right from the start.
