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The comparison
| Cash basis | Accrual basis | |
|---|---|---|
| Income counts when | Paid | Invoiced |
| Expenses count when | Paid | Incurred or billed |
| GST eligibility | Aggregated turnover under $10m, elected in your GST settings | Anyone, and compulsory above $10m |
| Cash-flow effect | You never remit GST you have not collected - the whole argument, and decisive for slow-paying customer bases | GST owed on invoices raised; bad debts claw it back later, after the cash gap |
| What it shows you | Where the money is | How the business is actually performing - debtors, creditors, the truth invoicing tells |
| Suits | Service SMEs, sole traders, anyone whose customers pay slowly | Inventory, progress-claim builders, anyone managing by their numbers |
The hybrid most SMEs actually run
Keep the software on accruals - invoices, bills, the real performance picture - with the GST reported on cash. Xero and its peers handle the translation natively, and it is the best-of-both default: management sees accrual truth, and the ATO gets paid when you do. The trap is not knowing which setting you are on. A file silently on accrual GST while the owner budgets on cash receipts remits GST on unpaid invoices all year, which is the classic self-inflicted BAS debt. Check the setting before your next Activity Statement.
Why the P&L and the bank disagree
On accruals, profit includes invoices not yet paid and excludes bills not yet due. Then there are the structural gaps on both bases: loan principal repayments (not deductible, very much cash), GST held in transit, asset purchases depreciating rather than expensing, and the owner's drawings living outside profit entirely - which in a company is also a Division 7A question.
A profitable business with no cash is usually a debtor-book and tax-timing story, not a mystery, and it is exactly the shape a weekly bookkeeping rhythm and a set-aside discipline exist to manage. Switching bases - growth forcing accruals, or electing cash GST you never knew you could - is a one-time transition with adjustment mechanics. Do it at a quarter boundary with your accountant so the changeover period is not double-counted or missed.
Frequently asked questions
Should my small business use cash or accrual accounting?
Who can use cash accounting for GST?
Why does my P&L show profit but there's no money?
Can I switch between cash and accrual?
Which setting is my software on?
General information only - not personal tax, financial or legal advice. Consider your own circumstances or speak to a registered tax agent. Remission of penalties or interest and payment plans are decisions of the ATO and outcomes can't be guaranteed.