The difference between cash and accrual accounting often becomes important at exactly the wrong moment.
A funder asks for a report, or the board wants to understand why the organisation has plenty of cash in the bank while the financial reports seem to tell a different story.
The answer often comes back to timing.
Cash and accrual accounting record the same financial activity in different ways. The method your organisation uses affects when income and expenses appear in your reports, how clearly you can see money owed or committed, and how easy it is for your board to understand the organisation’s true financial position.
For not-for-profits, there is another consideration too. Your choice may be influenced by ACNC requirements, funding agreements, your governing documents or other reporting obligations.
Here is what the difference means in practice.
What is the difference between cash and accrual accounting?
The simplest way to understand cash and accrual accounting is to look at when transactions are recorded.
Cash accounting records income when money is received and expenses when money is paid.
If you issue an invoice in June but the payment does not arrive until August, the income is recorded in August.
Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when the money moves through the bank account.
Using the same example, if the income relates to work completed in June, it may be recorded in June even though the cash does not arrive until August.
That timing difference can significantly change how your monthly, quarterly and annual financial reports look.
Why cash vs accrual accounting matters for your board
For a not-for-profit, financial reports do more than show whether money came in or went out.
They help boards and management understand:
- whether the organisation is operating within budget
- what money is still owed to the organisation
- what bills or other commitments remain unpaid
- how funding relates to activities being delivered
- whether apparent surpluses or deficits reflect operational performance or simply timing
- the organisation’s overall financial position.
This is one of the reasons accrual reporting can be valuable for boards.
Because it includes items such as receivables and payables, it can provide a more complete picture of what has happened during a reporting period, rather than showing only what has passed through the bank account.
For board members who may not have a financial background, that distinction matters. Clear reporting should help them understand what the numbers mean, not create another layer of questions.
Can a not-for-profit use cash accounting?
Sometimes.
For charities registered with the Australian Charities and Not-for-profits Commission (ACNC), the requirements depend partly on the size of the charity.
Small charities can generally use either cash or accrual accounting. However, they may still be required to use accrual accounting because of their governing document, a government department or agency requirement, or a funding agreement.
Medium and large charities are generally required to use accrual accounting when preparing their financial reports for the ACNC. (ACNC)
The ACNC currently defines:
- a small charity as having annual revenue under $500,000
- a medium charity as having annual revenue of $500,000 or more but under $3 million
- a large charity as having annual revenue of $3 million or more. (ACNC)
Not every not-for-profit is an ACNC-registered charity, so other requirements may apply depending on your structure, regulator and funding arrangements.
The important point is that the choice between cash and accrual accounting should not be made on simplicity alone.
Cash and accrual accounting side by side
Neither method is inherently better in every situation.
Cash accounting can work well for smaller organisations with straightforward income and expenses because it closely follows the movement of money through the bank account.
Accrual accounting requires more financial processes, but it can provide management and the board with a more complete view of the organisation.
In practical terms:
Cash accounting is generally simpler. Transactions are recorded when money is received or paid, so the bank account tells much of the story.
Accrual accounting provides more visibility. It includes amounts owed to the organisation and amounts the organisation still needs to pay.
Cash accounting makes the current bank position easy to see. That can be useful, but the bank balance alone does not necessarily tell you whether all of that money is genuinely available to spend.
Accrual accounting can make period-by-period reporting more meaningful. Income and expenses are recognised based on when they relate to the organisation’s activities rather than simply when cash changes hands.
Accrual accounting generally requires a stronger month-end process. Receivables, payables, accruals and other balance sheet items need to be reviewed and reconciled regularly.
For many growing not-for-profits, this additional work can be worthwhile because it gives leadership better information to work with.
What does accrual accounting mean for grants?
Grants are one of the areas where accrual accounting can become more complex.
It is tempting to assume that if a not-for-profit receives a 12-month grant upfront, the income should simply be spread evenly over 12 months.
Accounting treatment is not always that straightforward.
How grant income is recognised can depend on the terms of the funding arrangement and the obligations attached to it.
For example, under Australian Accounting Standards, an arrangement may fall within AASB 15 where there is an enforceable agreement containing sufficiently specific promises to transfer goods or services. Other arrangements may instead be accounted for under AASB 1058.
That means two grants of the same dollar value may not necessarily be treated the same way.
The practical lesson for an NFP board or executive is not that you need to become an expert in accounting standards. It is that grant income should be reviewed in the context of the actual funding agreement.
That becomes particularly important when grants cross financial years, have specific delivery requirements or contain obligations that have not yet been fulfilled.
Why grant timing can make reports confusing
Imagine your organisation receives a substantial funding payment close to the end of the financial year.
If that amount appears as income immediately, while much of the associated programme activity will take place in the following year, the first year may appear unusually strong.
The following year may then appear weaker because the programme costs are being incurred without the same level of income appearing in the reports.
Depending on the terms of the funding arrangement and the applicable accounting treatment, accrual accounting may allow the financial statements to better reflect the organisation’s obligations and activities across the relevant reporting periods.
This is one of the reasons grant accounting deserves careful attention.
The goal is not simply to make the numbers look smoother. It is to make sure the reports accurately reflect what the organisation has earned, what it still needs to deliver and what resources are genuinely available.
A simple cash vs accrual accounting example
Imagine a community service organisation completes funded work during June.
It invoices the funder for $20,000 on 20 June and pays $12,000 of supplier costs relating to that work before the end of the month.
The funder does not pay the invoice until August.
Under cash accounting, June includes the $12,000 supplier payment but no $20,000 income because the money has not yet been received.
Based solely on those transactions, June appears to have a $12,000 deficit.
When the $20,000 arrives in August, the income is recorded then, even though the work was completed months earlier.
Under accrual accounting, because the work was completed in June, the $20,000 income and the related $12,000 expense can both be reflected in June.
June therefore shows the financial result of the activity that actually occurred during the month.
When the payment arrives in August, it clears the amount that was recorded as owing to the organisation rather than creating new August income.
Same work. Same invoice. Same money.
But the reports tell a very different story.
Which accounting method is right for your organisation?
If your organisation is able to choose between cash and accrual accounting, there are several questions worth considering.
Check your reporting obligations
Start with what you are required to do.
Consider your ACNC obligations if you are a registered charity, as well as any requirements in your constitution, governing documents, grant agreements or government contracts.
Look at the complexity of your funding
An organisation relying mainly on simple donations may have very different reporting needs from one managing multiple government grants, service agreements and programme funding streams.
As funding becomes more complex, being able to see receivables, liabilities and the timing of income becomes more important.
Think about what your board needs from the reports
The purpose of financial reporting is not simply to produce accounts.
Your reports should help management and the board understand where the organisation stands and make informed decisions.
If your current reporting regularly requires lengthy explanations about timing differences, unpaid invoices or funding received in advance, it may be worth reviewing the underlying accounting approach.
Review your systems and processes
Accrual accounting works best when the processes supporting it are sound.
That includes:
- regular reconciliations
- accurate accounts payable and receivable
- clear grant records
- well-managed month-end processes
- consistent treatment of income and expenses
- reliable financial systems.
Xero and other cloud-based systems can support this well, but the software itself does not replace a good financial process.
Choose the timing carefully
If a change in accounting method is appropriate, it should be planned rather than treated as a simple software setting.
Opening balances, outstanding invoices, unpaid bills and other items may need to be reviewed so the new reporting basis starts from accurate information.
It is also important to make sure management and the board understand any change, particularly where it affects comparisons with previous financial periods.
Frequently asked questions
Generally, yes. Cash accounting involves fewer adjustments because transactions are recorded when money is received or paid. Accrual accounting usually requires stronger financial processes because amounts such as receivables, payables and accrued expenses need to be maintained and reconciled. The better question, however, is whether the method gives your organisation the information it needs.
Boards generally need a clear and complete picture of the organisation’s financial position. Accrual reporting can support this because it shows more than the movement of cash. It can include outstanding income, unpaid expenses and other obligations that may affect future decisions. Regardless of the accounting method, reports still need to be designed so non-financial board members can understand them.
The accounting basis used for your financial statements and the basis used to account for GST are related but separate considerations. Different GST reporting options can apply depending on an organisation’s circumstances, registration and eligibility. If you are considering changing your accounting method, your GST treatment should be reviewed as part of that process rather than assumed to change automatically.
Yes. The ACNC allows small charities to use either cash or accrual accounting, and some small charities choose accrual accounting because it gives management and the board better visibility of their financial position. (ACNC) A small charity may also be required to use accrual accounting because of its governing documents, government requirements or funding arrangements.
No. The appropriate accounting treatment depends on the grant agreement and the obligations attached to it. This is why grant agreements should be reviewed individually rather than applying a blanket rule based solely on the period covered by the funding.
Clearer reporting starts with the right foundations
Cash or accrual accounting is only one part of getting your financial reporting right.
The bigger goal is making sure management and the board have a clear picture of where the organisation stands, what funds are available, what obligations remain and what the numbers mean for the decisions ahead.
Hopscotch Accounting works with not-for-profits across Australia to strengthen financial systems, improve month-end processes and produce clear, board-ready reporting.
Our team brings deep experience across the NFP sector, helping organisations manage funding, reporting, compliance and day-to-day financial operations with greater clarity.
If your financial reports are creating more questions than answers, start a conversation with the Hopscotch Accounting team.
