A GST registered business has two lots of tax that they can pay on either ‘cash basis’ or ‘accrual basis’ accounting.

These two methods are:

  1. Income Tax Accounting method
  2. GST Accounting methold (BAS)

Cash basis and accrual basis accounting what is the difference? Understanding the difference between cash and accrual is essential for managing your business’s finances effectively. This detailed explanation provides a comprehensive overview of cash basis accounting and accrual basis accounting, particularly in the context of taxation and GST reporting. Let’s summarise the key points:

Cash Basis Accounting:

  • Definition: Tracks actual cash inflows and outflows.
  • Taxation Approach: Records assessable income based on payments received during the income year/BAS period.
  • Advantages:
    • Simple system.
    • Suited for small businesses with predominantly cash transactions.
    • Easy visualisation of current cash position.
  • Disadvantages:
    • Doesn’t reflect amounts receivable or payable.
    • May not be suitable for business growth for income tax purposes.

Accrual Basis Accounting:

  • Definition: Records sales and expenses when they occur, not necessarily when cash changes hands.
  • Taxation Approach: Adds payments received during the income year/BAS period, regardless of the period of work done.
  • Advantages:
    • Reflects true financial position with receivables and payables.
    • Suited for businesses with non-instantaneous cash payments.
    • Helpful for businesses handling large amounts of money.
  • Disadvantages:
    • Complicated, requiring in-depth understanding of bookkeeping.

Choosing Between Cash and Accrual:

  • Consider the size and structure of your business, complexity of transactions, handling of money, and the resources available.
  • If time allows, setting up bookkeeping software on accrual basis is recommended for a true financial position.
  • If behind in bookkeeping, processing on cash basis may be quicker. To do this, you must consider; what method are you for GST. If accrual this is most likely not possible. What method are you for income tax, if accrual than at the end of the financial year, you need to enter all bills outstanding and any sales invoices outstanding + ensure they are reconciled correctly in the subsequent months when the bill is receipted/paid.
  • Your tax agent must advise you on the method used for Income Tax purposes.
  • Your bookkeeper / BAS Agent / Tax Agent must ensure your income and expense are taken up as per the method(s) you are on.

GST Accounting Method

  • For businesses with aggregated turnover of less than $10 million, using either cash or non-cash basis is allowed.
  • Larger businesses typically use non-cash method for GST.
  • Many medium and small businesses use cash basis for BAS statements due to its simplicity.

Income Tax Accounting Method

A business’s assessable income and expenses for any given income year are determined by the chosen income tax accounting method, whether it be the cash basis or accruals basis. It is essential not to conflate these accounting methods with the two types of GST accounting methods, namely cash basis and accrual basis. Consistency in applying a single method for all transactions within an income year is crucial. Your accountant should provide guidance on income tax-related matters. The accrual method is commonly employed, where amounts from debtors (Accounts Receivable) and creditors (Accounts Payable) are included in determining the taxable income.

For further information please checkout what the ATO Accounting Methods.

Final Recommendations:

  • Extensive knowledge is crucial for accurate accounting records and BAS statements.
  • Professional assistance, such as hiring a top level bookkeeper or/and BAS agent, is advised for better management, especially in dealing with varying accounting methods.

This information provides a solid foundation for businesses to make informed decisions regarding their accounting methods, considering their specific needs and circumstances. If you require assistance, please reach out to us using the contact information provided on our website.