Cash accounting records revenue when cash is received and expenses when cash is paid, regardless of when the goods or services were delivered or received.
Cash accounting (also called cash-basis accounting) is the simpler of the two main accounting methods. Under cash accounting, you only record transactions when money actually changes hands. Revenue is recognised when you receive payment (not when you issue the invoice) and expenses are recognised when you pay (not when you receive the bill). This method is popular with small businesses and sole traders because of its simplicity. However, it can give a misleading picture of your financial position - for example, a large invoice issued in December but paid in January would appear as January revenue under cash accounting, even though the work was done in December. Most tax authorities allow small businesses below certain turnover thresholds to use cash accounting for tax purposes. In Australia, businesses with turnover under $10 million can use cash accounting for GST reporting. SortBooks supports both cash and accrual accounting methods in Xero, adapting its reporting to whichever method you use.
SortBooks automates the bookkeeping processes related to cash accounting by connecting to your Xero account and using AI to categorise transactions, reconcile bank feeds and generate accurate reports. Instead of manually managing cash accounting, SortBooks handles it automatically with 97%+ accuracy - saving you hours every week and ensuring your books are always up to date and compliant.
Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash changes hands. It provides a more accurate picture of your financial position than cash accounting.
Revenue recognition determines when and how revenue is recorded in your financial statements. Under accrual accounting, revenue is recognised when earned, not necessarily when cash is received.
Cash flow is the movement of money in and out of your business. Positive cash flow means more money coming in than going out. It is often considered more important than profit for business survival.
Tax compliance means meeting all your obligations to file tax returns, make payments and maintain records as required by your country's tax laws and tax authority.
SortBooks handles all the complexity automatically. Just connect Xero and let AI manage your books.