The Bank Says One Thing. Your Business May Be Saying Another.
Cash accounting follows money as it moves. Accrual accounting follows income earned and costs incurred. Understanding the timing difference helps make sense of GST, unpaid invoices, supplier bills and Xero reports.
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Cash asks when money moved. Accrual asks when the transaction happened.
Both methods use the same invoices, bills and bank transactions. What changes is the period in which the income or expense appears.
Cash basis
A transaction is recognised when payment is received or made.
- Customer income appears when the customer pays
- A supplier cost appears when the supplier is paid
- Unpaid invoices and bills are left out of a cash-basis report
Accrual basis
A transaction is recognised when income is earned or the cost is incurred.
- Customer income appears when invoiced
- A supplier cost appears when the bill is recorded
- Amounts owed by customers and to suppliers remain visible
You invoice $5,500 in June. The customer pays in July.
The work is complete and the customer now owes $5,500.
Accrual reports include the sale and debtor. Cash reports do not yet include the receipt.
The cash-basis report recognises the income when the money arrives.
Your bookkeeping basis, GST basis and income-tax treatment are related—but separate.
Bookkeeping records
Entering invoices and bills allows Xero to track debtors, creditors and business performance before cash moves.
GST accounting method
Your ATO registration determines whether GST is reported on a cash or non-cash basis. Eligibility rules apply.
Income-tax treatment
The method used for income tax is a separate tax question based on the business and applicable principles. Your tax agent should advise.
This is why a business may report GST on a cash basis while still entering invoices and bills and reviewing accrual reports in Xero. Those practices do not contradict each other.
Xero can show both views without maintaining two sets of books.
Invoices and bills are entered when issued or received, GST is reported using the registered GST method, and reports can be viewed on either a cash or accrual basis.
Correctly matching customer payments to invoices and supplier payments to bills allows Xero to preserve the transaction history. It also lets the business see what is owed, what is due and what has actually moved through the bank.
If bank-feed transactions are repeatedly entered as new Receive Money or Spend Money transactions instead of being matched, invoices and bills can remain outstanding even though they were paid.
The result is not a different accounting method. It is an inaccurate file.
Unmatched invoices and bills make both reports harder to trust.
An invoice is created
The customer owes the business, and the amount appears in accounts receivable.
The customer pays
The bank feed receives the deposit, but it is coded as a new sale rather than matched to the invoice.
The income may be duplicated
The invoice still appears unpaid while a separate cash transaction records another sale.
Reports stop agreeing with reality
Debtors are overstated, income may be duplicated and BAS or year-end review takes longer.
GST eligibility has rules. Income-tax treatment needs separate advice.
Eligible businesses may be able to account for GST on a cash basis. Other businesses use the non-cash method, and special rules or permissions can apply. Do not change the GST setting in Xero merely because one report looks easier to understand.
Confirm the method recorded with the ATO and coordinate any change with your BAS agent or tax agent. The income-tax accounting method is not automatically determined by the GST setting.
- Confirm the registered GST basis
- Use the same basis for each BAS period
- Enter invoices and bills consistently
- Match payments instead of duplicating them
- Review debtors and creditors monthly
- Ask your tax agent about income tax
Use cash for liquidity and accrual for performance.
Look at a cash report when you need to know
- What money has actually been received
- What has actually been paid
- How trading has affected available cash
- Why the bank position changed
Look at an accrual report when you need to know
- What the business earned during the period
- Which costs belong to that activity
- What customers still owe
- What the business still owes suppliers
Neither view replaces a cash-flow forecast. A profit report explains performance; it does not promise that enough cash will be available when wages, suppliers or the ATO must be paid.
Cash versus accrual accounting FAQs
What is the simplest difference between cash and accrual accounting?🐰
Cash accounting recognises transactions when money moves. Accrual accounting recognises income when earned and expenses when incurred, even if payment occurs later.
Can I report GST on cash while using accrual reports in Xero?🐰
Yes. Xero can maintain invoices and bills and produce accrual reports while the BAS uses the GST accounting method registered for the business.
Does cash-basis GST mean I should stop entering bills?🐰
No. Entering supplier bills allows you to manage due dates, documents and amounts owed. The GST reporting basis controls timing; it does not remove the need for complete records.
Why does my cash profit differ from my accrual profit?🐰
The difference commonly comes from unpaid customer invoices, unpaid supplier bills, prepayments and other timing items included in one view but not the other.
Can I change my GST accounting method in Xero?🐰
The Xero setting should agree with the method registered with the ATO. Confirm eligibility and the effective date with your BAS agent or tax agent before changing it.
Is accrual accounting only for large businesses?🐰
No. Small businesses that invoice customers or receive bills can benefit from accrual reports because they show outstanding debtors, creditors and period performance.
Does accrual profit mean the money is in the bank?🐰
No. Accrual profit can include sales that customers have not paid. Review cash, debtors and a cash-flow forecast alongside the profit and loss report.
Who should decide the method used for my business?🐰
Your BAS agent can help with the GST accounting method and Xero setup within scope. Your registered tax agent should advise on the appropriate income-tax treatment.
Check the setup before changing the report.
My Great Bookkeeper can review your Xero GST basis, invoice and bill workflow, bank matching and BAS reconciliation so the cash and accrual views each tell the story they are meant to tell.
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