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Accounting methods for business income
The amounts you include as your assessable income in any income year depend on whether you account for your income on a cash basis or accruals basis. Don’t confuse these two accounting methods with the two types of GST accounting methods (cash and non-cash).
You need to account for all transactions within an income year using the same method.
Cash basis
If you account for your assessable income on a cash basis you:
- include payments you received during the income year, even if the work was done in another income year
- don’t include amounts where the work was done, but you did not receive payment during the income year.
When you complete your tax return, you may have to reconcile any unpresented cheques to remove them from your income or deductions if you had previously included these amounts.
Accruals basis
If you account for your assessable income on an accruals basis, you include all income earned for work done during the income year, even if you hadn’t received payment by the end of the income year.
Example: Cash versus accruals basis
John manages his own business as a plumber. He completed a contract in May 2019 worth $10,000 (that is, in the 2018–19 tax year). His client paid the invoice on 10 July 2019 (that is, in the 2019–20 income year).
If he uses the:
- Cash basis method, he includes the $10,000 (less any GST) in his assessable income for 2019–20 because he received payment in that income year
- Accruals basis method, he includes the $10,000 (less any GST) in his assessable income for the 2018–19 year because he did the work in that income year.
