Accounting Method Australia 2025: Guide for Small Business

ByLouis Blythe Posted on

When it comes to managing business finances, few decisions have as much impact as choosing an accounting method. In 2025, recent updates from the Australian Taxation Office (ATO) have put a spotlight on how businesses track and report their income and expenses. Whether you’re a sole trader, run a growing startup, or manage an established company, understanding the difference between cash and accrual accounting—and how new rules might affect you—can make a significant difference to your tax obligations, cash flow, and business growth.

What Is an Accounting Method? Understanding the Basics

At its core, an accounting method is the set of rules your business uses to record financial transactions. In Australia, two main methods are recognised by the ATO:

  • Cash Accounting: You record income when you receive it, and expenses when you pay them.
  • Accrual Accounting: You record income when you issue an invoice (even if you haven’t been paid yet), and expenses when you receive a bill (not just when you pay it).

For most small businesses and sole traders, cash accounting is a popular choice because it’s simple and gives a clear picture of cash on hand. However, as your business grows, accrual accounting may offer more accurate insights into your financial health and obligations.

2025 Policy Updates: What’s Changed?

This year, the ATO has introduced new thresholds and guidance around accounting method selection, impacting how businesses can report GST, claim deductions, and manage compliance. Notably:

  • GST turnover threshold: Businesses with a GST turnover under $10 million can continue using cash accounting for GST purposes in 2025, up from the previous $2 million threshold.
  • Digital record-keeping requirements: The ATO now expects businesses to maintain digital records, regardless of accounting method, as part of its push for streamlined audits and e-invoicing adoption.
  • Method switching rules: If your business grows past the turnover threshold, you’re required to switch to accrual accounting at the start of the next tax year. The ATO provides transitional guidance to help manage this change.

For example, a Melbourne-based consultancy with a turnover of $9 million can remain on cash accounting for GST in 2025, but if it grows to $10.5 million, it must switch to accrual accounting for the 2025–26 tax year.

Cash vs Accrual: Pros, Cons, and Real-World Impacts

Deciding between cash and accrual accounting isn’t just about compliance—it affects everything from cash flow management to your ability to attract investors or secure finance.

  • Cash Accounting
    • Pros: Easier for small businesses with simple transactions; aligns with bank statements; tax is only paid on money actually received.
    • Cons: Doesn’t show future liabilities or revenue; may not suit businesses with lots of credit sales or purchases.
  • Accrual Accounting
    • Pros: Gives a fuller picture of income and expenses; better for tracking business growth; required as your business expands.
    • Cons: More complex; may require accounting software or professional help; can mean paying tax on income before it’s received.

Consider a Sydney-based e-commerce retailer. Using accrual accounting, it can record all sales made during the end-of-financial-year rush, even if payment is pending. This helps in forecasting and managing stock, but it also means being prepared for tax obligations before the cash is in the bank.

How to Choose and Change Your Accounting Method

For most startups and micro-businesses, cash accounting is an attractive starting point. But as your operations become more complex, accrual accounting often becomes essential—especially if you’re chasing investment, expanding interstate, or managing multiple suppliers and clients.

To select or change your accounting method in 2025:

  • Check your annual turnover to confirm eligibility for cash accounting.
  • Consider your business model: Are you offering credit to customers or receiving invoices before payment?
  • Review ATO guidance and ensure your accounting software supports your chosen method.
  • If you need to change methods, keep clear records of your income and expenses at the switch-over date to avoid double-counting or omissions.

Proactive planning pays off. Many Australian businesses are leveraging cloud accounting software—like Xero or MYOB—to automate compliance and switch seamlessly between methods as they grow.

Conclusion

Choosing the right accounting method is more than just a compliance tick-box—it’s a strategic decision that shapes your tax outcomes, cash flow, and business agility. With the 2025 ATO updates, there’s more flexibility for small businesses, but also new expectations around digital record-keeping and timely transitions as you scale. Assess your needs, understand the pros and cons, and make sure your accounting system is ready for the year ahead.

Louis Blythe is a writer at Cockatoo Financial Pty Ltd and has been in the finance industry 2012. Since then, his mission is to make business loans and home loans easy for everyone. And each year, he continues to help more people with understanding interest rates, borrowing power and living expenses.