The question of when to recognise income and expenses is one of the most foundational in accounting — and one that trips up many bookkeepers when clients are on different bases, or when a client needs to switch between methods.
This guide covers the practical differences between cash and accruals accounting for both GST (BAS) and income tax purposes, the eligibility rules, and how to handle a switch between methods.
Two Methods, Two Different Questions
Cash basis: Transactions are recorded when cash is received or paid. Income is recognised when the customer pays; expenses are recognised when the supplier is paid.
Accruals basis: Transactions are recorded when the entitlement to income arises or the obligation to pay is incurred. Income is recognised when the invoice is issued (or the service is delivered); expenses are recognised when the bill is received (or the liability is incurred).
The same business produces different financial statements under each method — particularly at year-end, when there may be significant invoiced-but-unpaid income or accrued-but-unpaid expenses.
| Factor | Cash basis | Accruals basis |
|---|---|---|
| Income recognised | When customer pays | When invoice is issued |
| Expense recognised | When supplier is paid | When bill is received |
| GST cash-basis eligibility | GST turnover under $10 million | Required above $10 million |
| Debtors and creditors in books | None | Accounts receivable and payable shown |
| Lender finance | Often not accepted | Typically required |
| Cash-to-accruals transition (income tax) | n/a | Generally spread over four years |
For GST (BAS Reporting)
Eligibility for cash basis GST: Businesses with GST turnover under $10 million can choose to report GST on a cash basis. Once chosen, both income (GST collected) and expenses (input tax credits) must be reported on the same basis.
Under cash basis GST:
- GST collected is reported when the customer pays, not when the invoice is issued
- Input tax credits are claimed when the supplier is paid, not when the bill is received
This simplifies BAS for businesses with variable debtor or creditor terms — you don't need to track who owes you GST that hasn't been paid yet. The flip side: a large unpaid customer invoice at quarter-end doesn't create a GST liability until it's actually paid.
Under accruals basis GST:
- GST collected is reported when the invoice is issued
- Input tax credits are claimed when the bill is received
For businesses with long debtor collection periods, accruals basis GST can create a cash flow issue — you report and pay GST on invoices before you receive the cash from the customer.
For Income Tax
The choice of accounting method for income tax is separate from the BAS method. The ATO allows most small businesses (under $10 million aggregated turnover) to choose cash or accruals for income tax purposes.
Cash basis income tax: Income is assessable when received; expenses are deductible when paid. Simple and closely mirrors actual cash flow.
Accruals basis income tax: Income is assessable when derived (generally when the invoice is issued or when the service is performed); expenses are deductible when incurred.
Many businesses use cash basis for GST reporting and accruals for their financial accounts — which is legitimate but creates the need for reconciliation between the BAS figures and the accounting records.
The Practical Bookkeeping Difference
The main practical difference is in how debtors and creditors are managed.
On accruals basis:
- When an invoice is issued: Debit accounts receivable, Credit income
- When the customer pays: Debit bank, Credit accounts receivable
- When a bill is received: Debit expense, Credit accounts payable
- When the bill is paid: Debit accounts payable, Credit bank
The balance sheet shows what's owed (debtors) and what's owing (creditors) at any point in time.
On cash basis:
- When the customer pays: Debit bank, Credit income
- When the bill is paid: Debit expense, Credit bank
No accounts receivable or payable balance in the books — income and expenses flow directly through bank. Simpler, but the financial statements don't show outstanding debtors and creditors as separate balance sheet items.
When Clients Should Be on Which Method
Cash basis suits:
- Service businesses with prompt payment (no significant debtor lag)
- Sole traders and partnerships with simple, low-volume transactions
- Businesses where cash flow management is the primary financial concern
Accruals basis suits:
- Businesses with significant debtors or creditors
- Businesses that need management accounts showing true profitability by period
- Businesses approaching $10 million turnover (accruals is required above $10M)
- Businesses seeking external finance (lenders typically require accruals-basis accounts)
Switching Between Methods
Changing from cash to accruals (or vice versa) requires care to avoid double-counting income or missing expenses. The transition involves:
Cash to accruals:
- Opening balance sheet entries for all outstanding debtors and creditors at the transition date
- Income earned but not yet received (accrued income) must be recognised
- Expenses incurred but not yet paid (accrued liabilities) must be recognised
- For income tax: the ATO has specific rules about how transitional adjustments are treated — generally spread over four years
Accruals to cash:
- Remove the outstanding debtors and creditors from the balance sheet (reverse the accrual entries)
- Ensure that income/expenses are not double-counted for periods that straddle the change date
For income tax purposes, a formal method change generally requires ATO notification and may require a transitional adjustment. The accountant should handle the tax implications; the bookkeeper manages the opening balance adjustments in the accounting software.
Year-End Cutoff and the Method Choice
The year-end cutoff is where the method choice has the biggest practical impact. Under accruals, all income earned by 30 June is assessable in the current year — even if payment isn't received until July or August. Under cash basis, only receipts actually received by 30 June are assessable.
A sole trader consultant on cash basis who invoices $20,000 on 29 June but receives payment on 5 July has no assessable income from that invoice in the current year. The same sole trader on accruals basis has $20,000 of assessable income — and a corresponding tax liability — in the current year.
Understanding which method each client is on, and being alert to year-end transactions that might affect the position differently under each method, is a core year-end bookkeeping skill.