The main difference between these two types of accounting is the timing of when we recognise the income and expenses.

Cash Accounting

Reporting on a cash basis is like looking in your bank account and only taking into account what you have already spent and received.

When You Record transactions: you record income when you actually receive the cash and expenses when you actually pay them.
Who should use this system: it’s a nice simple system, ideal for small businesses and those who want a straightforward way to see their cash flow.
Tax Implications: When you report on a cash basis, you only pay tax based on the actual cash you’ve received and can claim a deduction for the expenses you’ve actually paid for during the financial year.

Accrual Accounting

Reporting on an accrual basis is like looking at your bank account as well as all the invoices you’ve issued and all the bills you’ve received.  It doesn’t matter if you have actually received or paid out the money yet.

When You Record:  you record income when you issue the invoice (even if you haven’t received the payment yet) and expenses when you receive the bill (even if you haven’t paid it yet).  The key dates will be the date you issue your invoices and the issue dates on the bills you receive.
Best For: Complex businesses that need a more accurate picture of their financial health, especially those with inventories or that provide credit to customers.  It not only shows what you have already received and paid, but what you expect to receive and pay.
Tax Implications: When you report on an accrual basis, the tax is based on all the income you’ve invoiced and expenses you have been billed for.  This may mean that you pay tax on income you haven’t yet received but can claim a deduction on expenses you haven’t yet paid – it all comes down to the date it is invoiced or billed.

Why It Matters

Cash Accounting can be easier to manage and great for keeping track of actual cash flow.  Accrual Accounting provides a clearer picture of long-term profitability and financial health.
Choosing the right method depends on your business size, complexity, and financial needs.