Cash vs accruals: which accounting method suits a sole trader

A cash basis counts a sale when the money arrives and a purchase when the money leaves. An accruals basis counts a sale when you earn or invoice it and a purchase when you are billed for it, whether or not either has been paid. Most sole traders can choose, within limits set separately for GST and for income tax, and the choice changes which quarter and which financial year a given invoice lands in.

It is not a formatting preference. It decides what your BAS says this quarter and what your tax return says this year, and the two systems have their own rules about who may use which.

General information, not tax advice. The ATO is the authority - see ato.gov.au or ask a registered tax or BAS agent.

The difference, and where it actually shows up

Inside a single period the two methods usually land in the same place. The gap opens at a boundary: the end of a quarter, or the end of a financial year, with an invoice issued on one side of the line and paid on the other.

An illustration, not data. Assume a sole trader finishes a job on 20 June, issues a $7,000 invoice that day, and the client pays on 10 July. Assume nothing else about the year. June falls in one financial year and July in the next. On a cash basis that $7,000 is income of the later year, because that is when the payment arrived. On an accruals basis it is income of the earlier year, because that is when the work was done and billed. Same job, same money, two different returns. The ATO’s page on accounting methods for business income works through the same shape of example using a carpenter’s contract.

GST: who is allowed to use a cash basis

The ATO’s page on choosing an accounting method for GST sets out two methods, a cash basis and a non-cash basis, which it also calls accruals. Businesses with an aggregated turnover of less than $10 million, or that use cash accounting for income tax, may use either, and the page says most larger businesses must use the non-cash method. Aggregated turnover there includes closely associated entities, so check the current definition and figures on that page rather than assuming the number.

The same page lists the situations in which the cash method may be used. They include being a small business entity with an aggregated turnover of less than $10 million, not carrying on a business but having a GST turnover of $2 million or less, and accounting for income tax on a cash basis. Where none of the listed situations applies, the page says a business can ask the ATO to be allowed to account for GST on a cash basis.

The timing rules follow from the method. On a cash basis, GST goes on the activity statement covering the period in which you receive or make payment. On a non-cash basis, the ATO says GST payable on a sale belongs to the reporting period in which you issue a tax invoice or receive full or part payment, whichever happens first, which means a payment taken before the invoice is written lands in the period of the payment.

Income tax: a separate question with a separate answer

The ATO’s accounting methods page opens by warning against confusing these two methods with the two GST methods, and the warning is earned. For income tax, a cash basis means reporting income when you receive the payment even if the work was done earlier, and an accruals basis means reporting it when you earn it even if you have not been paid.

On which one fits, the ATO’s guidance is that reporting on a cash basis is generally only appropriate where business income is principally the result of your own labour. That leans one way for a consultant, tradesperson or designer billing their own time, and the other way for a business carrying stock, staff and substantial receivables. It is a general statement rather than a test that settles an individual case, so applying it to your own situation is a conversation for a registered tax agent. The same page also notes that all transactions within a financial year need to be accounted for using the same method, so this is a decision made once a year rather than invoice by invoice.

The two systems have their own rules, so the GST basis and the income tax basis can differ, though running both on the same basis is easier to keep straight.

What it changes on your BAS

The labels do not change. GST information sits at G1 total sales, 1A GST on sales and 1B GST on purchases regardless of method. What changes is which invoices fall inside the quarter.

On a cash basis, an invoice issued in March and paid in April belongs to the June quarter, and no GST on it is owing on the March statement. On a non-cash basis the same invoice generally belongs to the March quarter, and the GST is payable then whether or not the client has paid. Purchases move the same way in reverse: a cash basis claims the credit when you pay the supplier, an accruals basis generally when the invoice is issued or payment is made, whichever comes first. The quarterly mechanics either way are in BAS due dates and how to prepare, and the conditions a purchase has to meet before there is a credit at all are in GST on business expenses.

The practical consequence is narrow but sharp. A non-cash basis can leave you remitting GST on an invoice a slow client has not paid yet, funding their delay out of your own account until they do.

Cash reality against profit reality

Each method answers a different question well.

A cash basis tells you what actually happened to your bank account. The ATO’s page puts it as the money flowing through the business being better aligned with your activity statement liabilities, which makes the quarter easier to fund. Its weakness is that it flatters a period where you invoiced heavily and were not paid, and punishes the period where the backlog finally clears.

An accruals basis tells you what the business earned. The ATO describes it as a way to track your true financial position, what is owed to you and what you owe, and notes it suits businesses that are not paid immediately. Its weakness is that it can report a profitable quarter while the bank balance falls, because profit and cash are not the same measure.

Neither is better in the abstract. A sole trader with a handful of clients who pay slowly generally feels the cash basis as relief; one who wants to see whether the work itself is profitable generally gets a clearer picture from accruals.

Switching later

Switching is possible but not casual. The ATO’s page says to contact the ATO, or have your accountant do it on your behalf, and that a change from the cash method to the non-cash method can only take effect on the first day of a tax period.

The first period after a change is the one that needs care. The page says you then have to account for sales and purchases not previously accounted for, including GST on sales invoiced before the change but not yet paid, and the balance of GST on sales already partly accounted for. Unclaimed GST credits you hold a tax invoice for may also be claimable in that first period. That transition is exactly where an amount gets counted twice or missed entirely, so it is worth walking through with a registered tax or BAS agent before the period starts rather than after it ends.

How Apsis helps

Apsis records what you invoiced and what has actually been paid as separate facts, so the two numbers the choice turns on are visible without reconstructing them from a bank statement. The invoice list filters by status, searches by number, title or client, and flags overdue invoices, which shows how far apart your invoiced and paid positions have drifted at the end of a quarter, and a part-paid status keeps a half-settled invoice from rounding to paid or unpaid. GST is computed from the line items rather than typed in, and expenses carry a receipt upload so the purchase side has its document attached. Invoices and expenses are on the free plan, which covers 5 clients and 20 invoices a month. On the paid plan, the tax module adds a GST and BAS view and an income tax estimate for the period.