Cash vs accrual: why your bank balance isn't your income
Two ways of counting money, two very different pictures of your business. Here's which one you're probably using and why it matters at tax time.
You invoiced $12,000 in March. Your bank account went up by $4,000 in March — because the other $8,000 hasn’t been paid yet. How much did you earn in March?
The answer depends on which accounting method you use, and getting it wrong can mean paying tax on money you haven’t received, or not paying tax on money you have.
Cash basis: money in, money out
Cash accounting counts income when you receive it and expenses when you pay them. If the $12,000 invoice gets paid in April, it’s April income. Simple, intuitive, and how most freelancers naturally think about money.
The upside: you never pay tax on money you haven’t received. The downside: your “income” can swing wildly month to month based on when clients happen to pay, not when you did the work.
Accrual basis: earned is earned
Accrual accounting counts income when you earn it — when the invoice is issued, not when it’s paid. That $12,000 invoice counts as March income even if the money arrives in April. Expenses work the same way: a bill you receive in March is a March expense even if you don’t pay it until April.
The upside: your income reflects the work you actually did each period. The downside: you might owe tax on revenue that’s still sitting in someone else’s bank account.
Which one are you using?
If you’re a sole trader or small freelancer in Australia, you’re almost certainly on cash basis — it’s the default for businesses under $10 million. If you’re a company or a trust, your accountant may have put you on accrual.
The distinction matters most at the edges of a financial year. If you invoice $20,000 in June and it gets paid in July, cash basis means it’s next year’s income. Accrual basis means it’s this year’s. Depending on your tax bracket, that timing could cost or save you thousands.
What this means for your invoicing
Whichever method you use, your invoicing tool needs to track both the issue date and the payment date — because your accountant needs both. Autobooks records when a document was issued (the accrual moment) and when payments were received (the cash moment), so the numbers are there regardless of which method your accountant uses.
The point isn’t to choose one method over the other — your accountant will tell you which one applies. The point is to understand what the numbers mean so you’re not surprised at tax time.