For finance professionals managing growing businesses, selecting the right accounting method isn’t just a technical decision—it has practical implications for cash flow, reporting, and long-term planning. Whether you manage the books yourself or work with an accountant, understanding the difference between cash and accrual accounting is critical to ensuring your business stays compliant and maintains financial clarity.
This guide explains what cash and accrual accounting are, their advantages and disadvantages, and how to decide which method is best suited to your business’s needs.
What is cash accounting?
Cash accounting records transactions when money physically moves—when you receive payment or pay a bill. Revenue is recorded when cash is received, and expenses are recorded when they are paid.
This method is straightforward and often preferred by smaller businesses with simpler operations or those focused on cash flow management.
What is accrual accounting?
Accrual accounting records revenue and expenses when they are earned or incurred, regardless of when the cash changes hands.
For example, if you issue an invoice today but receive payment next month, the revenue is recorded today.
This method gives a clearer picture of a company’s financial performance over time, which is why it’s widely used by larger or growing businesses and required under accounting standards when revenue exceeds certain thresholds.
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Key differences between cash and accrual accounting
| Feature | Cash accounting | Accrual accounting |
|---|---|---|
| Timing | Records cash when received or paid | Records income and expenses when earned or incurred |
| Complexity | Simpler, fewer entries | More complex, requires tracking receivables/payables |
| Financial picture | Focuses on cash flow | Reflects profitability more accurately |
| Compliance | Suitable for small businesses under turnover thresholds | Required for larger businesses under accounting standards |
When to use cash vs accrual accounting
The choice often depends on business size, complexity, and financial goals:
- Cash accounting: Best for businesses with straightforward transactions and a focus on cash flow, such as sole traders or partnerships with annual turnover under the ATO’s threshold.
- Accrual accounting: Ideal for businesses that issue invoices, have significant accounts receivable/payable, or want a more accurate reflection of profitability.
Benefits of cash accounting
Cash accounting is simple and easy to manage, which makes it an attractive option for businesses with straightforward financial operations. It directly aligns with cash flow, providing a clear picture of available funds at any given moment. Because transactions are only recorded when money changes hands, there is less bookkeeping involved, making it particularly suitable for businesses with a low volume of transactions.
Benefits of accrual accounting
Accrual accounting provides a more complete view of a business’s financial performance by recognising revenue and expenses when they are earned or incurred, rather than when cash is received or paid. This approach ensures that income and expenses are matched to the period they relate to, supporting better decision-making and planning. It also enables more robust reporting, offering business owners and finance teams a clearer understanding of long-term profitability and financial trends.
Things to consider before choosing
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Regulatory requirements: The ATO may require accrual accounting if turnover exceeds certain limits.
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Business complexity: Businesses with inventory or longer sales cycles often benefit from accrual methods.
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Reporting needs: If you need a clear view of profitability over time, accrual accounting is generally preferred.
How Budgetly supports accurate expense reporting
No matter which accounting method you adopt, accurate record-keeping is crucial. Budgetly doesn’t dictate whether you use cash or accrual accounting but ensures the data feeding into your accounts is clean, categorised, and available in real time.
With Budgetly, finance teams can:
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Issue virtual prepaid cards to employees to manage expenses proactively
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Capture receipts at the point of purchase
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Categorise transactions automatically to support coding accuracy
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Sync expense data with accounting platforms like Xero
Budgetly empowers finance teams to spend less time on manual reconciliations and more time on financial analysis—regardless of the accounting method in place.
Looking ahead: Building financial clarity
The choice between cash and accrual accounting ultimately depends on the size, complexity, and goals of your business. Both methods have their place, but whichever you choose, maintaining accurate records is critical.
By adopting tools like Budgetly for expense management, you ensure that your accounting records are supported by reliable, real-time data—giving your business the clarity and confidence it needs to grow.
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