Accounting methods for business income
The different accounting methods for including assessable income in an income year.
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Accounting methods
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 2 accounting methods with the 2 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 a different 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. This is even if you hadn't received payment by the end of the income year.
Example: cash versus accruals basis
Dimitris manages his own business as a carpenter. He completes a contract in May 2022 worth $7,240 (in the 2021–22 income year). His client pays the invoice on 10 July 2022 (in the 2022–23 income year).
If he uses the:
- cash basis method – he includes the $7,240 (minus any GST) in his assessable income for 2022–23 income year because he received payment in that income year
- accruals basis method – he includes the $7,240 (less any GST) in his assessable income for the 2021–22 income year because he did the work in that income year.
End of exampleDeclaring income from a farm management deposits account
If you are a primary producer eligible to concessional tax treatment under the farm management deposits (FMD) scheme, it is important you understand how to declare any income from this account.
What happens if I deposit money into an FMD?
If you deposit into an FMD account you can claim a tax deduction in that income year (under certain conditions).
What happens if I take money out of an FMD?
When you redraw from your account, we treat the amount as assessable income in that year.
If you redraw an amount within 12 months of depositing it, you generally can't claim a tax deduction. However, if the repayment is due to an exceptional circumstance, such as drought or an applicable natural disaster, it can be deductible.
For more information about income and deductions under the FMD scheme see Farm management deposits scheme.
The different accounting methods for including assessable income in an income year.