What is cash accounting?

By Book Keeping Pros
Sources checked 15 Oct 2026

Definition

Cash accounting records income when payment is received and expenses when they are paid, rather than when an invoice is sent or a bill arrives. It is simple and shows the cash a business has, but it does not show money owed to the business or money it owes.

With cash accounting, the books follow the bank account. An invoice sent on Tuesday and paid on Thursday is recorded on Thursday. Spending works the same way: a supplier bill that arrives in May but is paid in June becomes a June expense. Because nearly every entry starts from a bank line, regular bank reconciliations do most of the work of keeping the books right.

Because unpaid invoices and bills are not in the books, they have to be tracked separately to know what customers owe and what the business owes its suppliers. A simple list of invoices sent and bills received, each with its due date, is enough for many small businesses. Without one, a month of strong takings can look comfortable even while large bills are waiting to be paid.

Profit under cash accounting moves with the timing of payments rather than with the work done. A customer who settles three months of invoices at once makes one month look strong and the two before it look weak, and paying a full year of insurance in one month drags that month down. Reading several months together, alongside the list of unpaid invoices, gives a fairer picture than any single month on its own.

In Australia

business.gov.au's guide to cash and accrual accounting says cash accounting is a simple system that suits smaller businesses with mostly cash transactions, such as a hairdresser or a grocery store, and gives a picture of how much money is in the till and the bank.

It also points out the limitation: cash accounting doesn't show money owed to you or money you owe to others.

On choosing a method, the guide suggests weighing up the size of the business, how complicated its transactions and processes are, whether it has the resources to run accrual accounting, and whether an electronic system would change things. For anyone who is unsure, it recommends talking to a professional.

Worked example

Illustrative example: one month's profit under cash accounting
Item	Amount (AUD)
Customer payments received in March, including one for a February invoice	6,200.00
Bills and expenses paid in March	3,900.00
Profit for March under cash accounting	2,300.00
Invoices sent in March and still unpaid at 31 March, left out of the profit	1,800.00

Illustrative example only: these rows show the method and are not sourced data.

Common mistakes

Forgetting unpaid supplier bills because they are not in the books yet.
Losing track of unpaid invoices, because nothing in the books shows them until they are paid.
Judging a single month's profit when a large annual bill or a bulk customer payment happened to land in it.
Coding every deposit into the bank as a sale, even when it is a loan, money the owner put in or a refund from a supplier.
Keeping the bank statement but not the invoice or receipt that shows what each payment was for.

Common questions

What is the difference between cash accounting and accrual accounting?

The difference is timing. Cash accounting waits for money to move: a sale goes into the books on the day the customer pays, and a cost on the day the business pays it. Accrual accounting records the sale when the work is done or the goods are supplied, and the cost once it has been incurred, paid or not. The same transactions can therefore land in different months under each method.

Does cash accounting have accounts receivable?

Not in the ledger. Under cash accounting an invoice becomes income only when the customer pays, so no receivables balance builds up in the books. The customer still owes the money, so those invoices need following up from a separate list. If the business later moves to accrual accounting, the invoices still unpaid at the changeover have to be brought into the books, usually with help from your accountant.

How do you calculate net income under cash accounting?

Add up the money received from customers during the period, then take away the business expenses paid in that same period. What is left is the net income, or profit, on a cash basis. Leave out money that is neither a sale nor an expense, such as a loan paid into the account or money moved from one of the business's bank accounts to another. Larger purchases such as equipment may be treated differently, so check those with your accountant.

Related terms

Related service

Small business bookkeeping

Your books kept current, every month.

More about small business bookkeeping

Sources

Choose between cash and accrual accounting
business.gov.au, Australian Government. Current at 15 October 2026, released 13 September 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.