When running a business, keeping your finances in order is non-negotiable. But how you record and track your income and expenses can make a big difference in how you view your business performance and plan for the future.

Two of the most common methods are cash accounting and accrual accounting. Choosing the right one depends on your business size, structure, and long-term goals.

In this article, we’ll break down each method, explore the pros and cons, and help you decide which approach best suits your business.

What is Cash Accounting?

Cash accounting is the simplest method of tracking your business finances. Income is recorded when cash is received, and expenses are recorded when cash is paid out.

For example, if you send an invoice in July but don’t receive payment until August, the income is recorded in August when the money actually hits your account.

Advantages of Cash Accounting

Easy to understand and implement
Ideal for small businesses and sole traders
Clear view of available cash on hand
Lower compliance and reporting requirements

Disadvantages of Cash Accounting

Doesn’t show money owed to you or by you
Can give a misleading picture of profitability if income and expenses don’t align
Not suitable for larger businesses or those required by law to use accrual accounting

What is Accrual Accounting?

Accrual accounting records income and expenses when they’re earned or incurred, regardless of when cash changes hands.

Using the same example: if you issue an invoice in July, you record the income in July, even if payment comes in August.

Advantages of Accrual Accounting

Provides a more accurate picture of profitability
Matches income with expenses for better long-term analysis
Required for larger businesses and companies with inventory
Helps with forecasting and growth planning

Disadvantages of Accrual Accounting

More complex to manage
May require accounting software or professional support
Doesn’t always reflect the actual cash available in the bank

Which Method is Best for Your Business?

The answer depends on your goals and obligations:

Cash accounting is best for small businesses, freelancers, and sole traders who want simplicity and a direct view of their cash flow.
Accrual accounting is best for growing businesses, those with employees or inventory, or anyone needing a true picture of profitability over time.

In Australia, the ATO requires businesses earning over $10 million annually to use accrual accounting. For smaller businesses, the choice is yours.

Pro Tip: Even if you’re eligible for cash accounting, adopting accrual early can prepare your business for growth and make financial planning easier.

Final Thoughts

Both methods have their place. If you’re just starting out and want to keep things simple, cash accounting may be the way to go. But if you want a clearer financial picture to make informed decisions, accrual accounting is the smarter choice.

At The Bookkeeper’s Touch, we specialise in helping businesses choose and manage the right accounting system so you can focus on growing your business.

👉 Need help deciding? Contact us today to discover the method that best fits your goals.

Cash vs Accrual Accounting: What’s Best for Your Business?