Cash vs accrual accounting for not-for-profits

One of the more consequential decisions a not-for-profit leader inherits is quietly the one the organisation thinks about least: which accounting method the books actually run on. Most executive officers and boards we meet never chose it deliberately. It was set in the early years, on the advice of whoever was configuring Xero at the time, and never revisited as the organisation grew from a single program into a multi-grant, multi-funder operation.

Sometimes that original call was right. Often it wasn’t. And the organisations where it wasn’t tend to hit a wall once they cross into seven-figure budgets with restricted grants and government contracts, where the books they set up as a small charity stop being able to answer the questions the board and the funders are now asking.

So let’s settle it clearly. If you’re stewarding a not-for-profit and you want one answer that’s right for nearly every organisation we work with: accrual accounting is how you should manage and report on the organisation. Cash basis has specific, narrow uses (the cash flow forecast, certain GST and compliance situations) that are important and shouldn’t be dismissed, but those are supplementary instruments. Your management and reporting books (the financials you use to steward the organisation, report to the board, and account to funders) should be on accrual. This post explains why, where cash basis still matters, and what it looks like to run both in parallel without it becoming a chore.

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The difference in one paragraph

Cash basis accounting records income when money arrives and expenses when it leaves. Accrual accounting records expenses when incurred and service revenue as performance obligations are satisfied. Grant income needs a separate assessment: an enforceable agreement with sufficiently specific performance obligations can fall under AASB 15. AASB 1058 generally recognises other grant income when the asset is recognised, after accounting for related liabilities and other amounts. A restriction on spending does not, by itself, defer income.

For a small charity with unrestricted donations and a few bills, the two methods may give similar results. A multi-program organisation needs to track each funding agreement and its delivery costs. Under AASB 15, cash received before the relevant services are delivered is a contract liability. That liability measures unfulfilled obligations, not simply cash left in the bank. Track restricted funds separately regardless of the income-recognition method.

Accrual

Your management & reporting books

Service revenue follows performance; grant treatment depends on the agreement and applicable standard. Expenses are recorded when incurred.

• ✓ Surplus or cost by program and fund
• ✓ Real period-to-period trends
• ✓ Contract liabilities shown where delivery obligations remain
• ✓ What auditors and funders expect (and the ACNC requires of medium and large charities)

Cash basis

A supplementary instrument

Revenue and expenses counted when money moves. Useful in two narrow, important places, not as your management view.

• • The 13-week cash flow forecast
• • Some GST situations (ask your tax agent)
• ✗ Hides program surplus and distorts the trend
• ✗ Does not show all outstanding obligations

Think about how you’d manage your own household finances. If you walked into an ATM every morning, checked your bank balance, and made every major decision based on just that number, you’d make a lot of bad ones. The balance doesn’t know about the pay landing next Friday, the rates bill due in two weeks, or the insurance auto-draft in six days. It tells you one thing accurately: how much cash is in the bank right now.

What you actually need, to manage well, is a fuller view that understands income earned (not just received), obligations committed (not just paid), and the timing between them. Your organisation works the same way. Cash accounting records receipts and payments, but the bank balance alone cannot explain outstanding obligations. Accrual is the full-picture view. You need both, for different moments, but you wouldn’t run your life on the first one alone, and you shouldn’t steward an organisation on it either.

This is why the “which method is right for a not-for-profit?” question doesn’t have a single answer: it depends on what question you’re answering. Steward the organisation and report to the board? Accrual. Forecast cash next month? A cash-basis view. Handle the BAS or a specific compliance matter? A conversation for your tax agent. Most boards treat the question as binary because the organisation was set up on one method and never told there was a choice beyond that.

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Why accrual is how you steward a not-for-profit

Every consequential question a not-for-profit board and leader asks depends on accrual answers. The three biggest:

Is this program running a surplus or a deficit? Compare recognised program income with delivery costs and allocated overhead. Under AASB 15, revenue follows the delivery of promised services, while AASB 1058 may require grant income up front. Explain those timing differences and show the remaining restricted funds and delivery commitments alongside the reported result. A surplus in the accounts does not necessarily mean cash is available for another program.

Is the trend getting better or worse? Compare program income, delivery costs and overhead across periods. Under AASB 15, recognising revenue as the promised services are delivered can make delivery trends clearer. An AASB 1058 grant may still produce income up front in accrual accounts. Explain that timing to the board and use a separate fund report to show the remaining restricted balance. Do not defer income simply to smooth the trend.

Where do we commit, hold, or restructure? Every major decision (a new program hire, a multi-year service commitment, taking on a contract that pays slowly) is a decision about future obligations against current economics. You need to know your real current economics to make those decisions well, fund by fund. Cash basis would give you numbers that move more because of when a tranche landed than because of how the organisation is actually performing. The cash flow forecast we wrote about in our post on building a cash flow forecast for not-for-profits sits on top of accrual books for exactly this reason.

External reporting obligations also matter. Medium ACNC charities (annual revenue of $500,000 to under $3 million) and large charities ($3 million or more) generally prepare accrual financial reports, subject to applicable exemptions. Small charities can use cash or accrual accounting unless another obligation, such as a governing document or funding agreement, requires accrual. Confirm the requirements that apply to your organisation before changing methods.

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Where cash basis still matters (and it matters more than most boards realise)

None of the above means cash basis is useless. It matters in two specific, important places, and finance leaders who ignore those places end up with other problems.

The cash flow forecast. A 13-week rolling cash flow forecast, the single most useful short-term planning instrument a not-for-profit has, is built on cash-basis logic. It tracks when money will actually move in and out of the bank, not when revenue or expenses are being recognised on the statement of profit or loss (the report that summarises revenue and expenses over a period and produces the surplus or deficit). The free NFP cash reserve planner uses the same cash view to set a reserve from when your money actually arrives.

If you try to build a 13-week forecast using accrual numbers, it tells you whether the organisation is healthy but not whether Friday’s payroll is at risk. We wrote about how to build a cash flow forecast for your not-for-profit as the companion to this conversation, because this is where the two instruments work together. Accrual underneath tells you whether each program and fund is sustainable. Cash basis on top tells you whether you’ll see that health translate into unrestricted cash soon enough to fund next week’s payroll. You need both.

GST and compliance. Being a not-for-profit doesn’t mean tax-free or reporting-free. Treatment varies by organisation type, turnover, and circumstances, and we’re explicitly not giving tax advice here (that’s a conversation for your tax agent). What we can say is that some not-for-profits are permitted to account for GST on a cash basis for the BAS even while reporting on accrual, and the interaction between GST reporting, ACNC obligations, DGR and tax-concession status, and grant-agreement requirements gets complicated quickly.

Most funders and most audits will still expect accrual financials regardless. The sensible approach we see is: run management and reporting books on accrual always, and work with your tax agent to determine whether any cash-basis treatment applies to your GST or other filings.

For readers who want a plain-English overview of the accounting-method distinction from a neutral source, the ACNC has a clear guide that goes deeper into the mechanics and sets out which charities must report on accrual. For the 13-week forecast method, AICPA & CIMA is an authoritative source.

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A worked example: the multi-year grant tranche

Consider an illustrative three-year youth-program grant of $900K, paid in annual tranches of $300K. Assume an enforceable agreement requires 300 distinct, equally valued sessions each year, with $1,000 allocated to each session. An accountant has assessed these as sufficiently specific performance obligations under AASB 15. The first $300K tranche is received in advance. All figures are in Australian dollars and exclude any GST.

On cash basis, receiving $300K and paying $260K in delivery costs produces a $40K excess of receipts over payments. That figure alone does not tell the board whether all promised sessions have been delivered.

On accrual, suppose 240 of the 300 sessions have been delivered at year-end and the $260K paid also equals the expenses incurred. Revenue is 240 × $1,000 = $240K. The remaining $60K is a contract liability for the 60 undelivered sessions. The program has a $20K deficit ($240K revenue less $260K expenses), even though $40K of the cash remains. If instead all 300 sessions had been delivered for the same $260K cost, and the agreement allowed the organisation to retain the surplus, revenue would be $300K and the $40K surplus would be genuine.

A note on the accounting standards. The example uses delivered sessions to measure performance. Spending is not automatically a measure of revenue. A cost-based input method must faithfully depict performance relative to the total expected inputs. See AASB 15, paragraphs 39–45, B18–B19 and F20–F26. Where AASB 15 does not apply, AASB 1058, paragraphs 9–10 generally requires immediate income recognition after related amounts are recognised. Specific rules apply to grants to acquire or construct an asset the organisation will control. Have your accountant or auditor assess each agreement; unspent restricted funds are not automatically liabilities.

Keep restricted and unrestricted funds distinct in either accounting system. A cash balance, a restricted fund balance and a contract liability answer different questions. Reconcile them and report outstanding delivery obligations alongside available cash so the board can see what can be spent and what still needs to be delivered.

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Running both in parallel: what it actually looks like

The setup that works for the organisations we see stewarding funds well is straightforward: accrual management and reporting books as the foundation, a weekly cash flow forecast (built on direct-method cash logic) on top, and any GST or compliance question handled separately with a tax agent.

The practical mechanics:

The books are structured properly in the first place. This is the part most organisations skip, and it’s the part that makes everything else work. Restricted and unrestricted funds need to be tracked in separate accounts (fund accounting). Grant and contract revenue needs to be recognised at the right time under the applicable standard. Recognise a liability only when its criteria are met, and track restricted balances separately. Program delivery costs need to be separated from core overhead, and tagged to the fund that pays for them. Maintain and reconcile these records throughout the year. Done wrong, every report tells a slightly different story depending on which month you look at, and the audit becomes a scramble.

The monthly close produces an accrual statement of profit or loss and balance sheet (a snapshot of what the organisation holds versus what it owes, including any contract liabilities or other grant liabilities, at a single point in time). This is the management and board view. Surplus or cost by program, overhead as a share of total expenses, reserve levels, restricted versus unrestricted position, all on accrual-adjusted numbers. If you’re working with a financial partner, this is the conversation you should be having every month, about what the trend is saying and what it implies for the board.

A weekly cash flow forecast operates in parallel. Built on the bank reality, not the accrual reality, and tracking unrestricted cash specifically. It answers: given which tranches and reimbursements land when, given what’s going out when, will we have enough spendable cash nine weeks from now? This is the instrument that drives hiring timing, which specific grant reports and reimbursement claims to chase, and reserve decisions.

Compliance sits in its own conversation. Your BAS is prepared and lodged by a registered BAS or tax agent; the ACNC Annual Information Statement is lodged by the charity, often with its bookkeeper or auditor; your tax agent advises on concessions and any tax question. Management books don’t change based on what a filing chooses.

A cash forecast needs assumptions about receipt dates, payment dates and spending restrictions as well as accurate books. Reconcile it to the accounts and update it as contracts, collection expectations and costs change. Clean records help, but they do not make the forecast automatic.

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The three signs you’re on the wrong method for management books

These three patterns are reasons to review accounting treatment and reporting design. They do not, by themselves, prove that the books use the wrong accounting basis.

Three reasons to review your reporting

Check accounting treatment, fund tracking and report design

1. 1

   Financials swing, programs don’t

   Check whether swings reflect cash timing or the applicable grant-recognition rules. AASB 1058 income can be lumpy even on accrual.

2. 2

   You can’t pull surplus or cost by program or fund

   Check program coding, fund tracking and revenue recognition. Changing accounting basis alone will not fix missing or misallocated records.

3. 3

   Your auditor or funder reconstructs your numbers

   If the audit means restating cash books onto accrual, or a funder questioned how you recognised a grant, external readers are discounting what they don’t recognise.

Your monthly financials swing wildly without your programs swinging wildly. Investigate income recognition and payment timing. Some movements reflect cash accounting, while others arise correctly under AASB 1058. Explain these movements alongside program delivery and restricted-fund reports rather than assuming accrual accounting will remove them.

You can’t pull a surplus or cost figure by program or fund. Review program coding, allocation of shared costs, fund tracking and revenue recognition. Accrual accounts still need those records and appropriate reports to explain program performance.

Your auditor or a funder has had to reconstruct your numbers onto accrual. If the annual audit involves restating cash-basis books onto accrual, or a major funder has questioned how you recognised a grant, that’s the moment to stop running management books on cash. External readers are trained on accrual financials and deferred grant income, and they’ll question what they don’t recognise. Reconstructing accrual financials after the fact is far more painful than maintaining them all along.

If these patterns are familiar, review the funding agreements, accounting policies and program reports with your accountant or auditor. Use the accounting basis required for your organisation, maintain clear fund records and keep an updated cash forecast alongside the financial reports.

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FAQ: Cash vs accrual accounting for not-for-profits

Is accrual or cash accounting better for a not-for-profit?

Accrual accounts are useful for managing multi-program organisations and are required for ACNC financial reports from medium and large charities, subject to applicable exemptions. Small charities can use cash unless another obligation requires accrual. Grant recognition still depends on the agreement and AASB 15 or AASB 1058; accrual does not guarantee that income will match program costs. A separate cash forecast helps manage payment timing.

Why is cash basis accounting not good for managing a not-for-profit?

Grant receipts, reimbursements and delivery costs can occur in different periods. Cash accounts show those movements but do not show every receivable or liability. Accrual accounts add that information, while separate fund reports show spending restrictions. Some grants are recognised up front even on accrual, so neither accounting basis replaces an assessment of the agreement.

How does accrual accounting handle a restricted grant?

Where an enforceable agreement contains sufficiently specific performance obligations, AASB 15 recognises revenue as those obligations are satisfied. An advance for undelivered services is a contract liability. Other grants generally follow AASB 1058, which can require immediate income recognition after related amounts are accounted for; capital grants have specific rules. Restricted or unspent cash is not automatically deferred income. Keep a separate record of spending restrictions and have your accountant or auditor confirm the treatment.

When should a not-for-profit use cash basis accounting?

Cash basis matters most in two places. First, the 13-week cash flow forecast used to manage short-term unrestricted cash is built on cash-basis logic because it tracks actual bank movements. Second, some not-for-profits may account for GST on a cash basis for the BAS, which is a conversation for your tax agent. Both are supplementary to accrual management and reporting books, not replacements for them.

Do we need to choose between cash and accrual, or can we use both?

You can and should use both, for different purposes. Management and reporting books run on accrual. A weekly cash flow forecast runs on cash-basis logic on top. GST and compliance are handled separately on whatever basis your tax agent recommends. The three don’t conflict when the underlying bookkeeping and fund accounting are structured correctly.

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If your current books can’t answer the questions the board is asking

The right accounting method for a not-for-profit is rarely the complicated question boards treat it as. Accrual for the management and reporting books. Cash basis for the 13-week forecast. GST and compliance sit separately with a tax agent. The harder question, and the one boards should be asking instead, is whether the bookkeeping foundation underneath is structured in a way that makes both views possible and trustworthy, with restricted and unrestricted funds properly separated.

If you’re running on cash basis books today, or on accrual books where the fund structure is loose enough that you can’t trust the numbers, the fix is usually straightforward but methodical. The layered-cake idea behind how we work at Visory starts here: the bookkeeping foundation is what makes everything else possible, and getting it right is the unglamorous work that unlocks every other financial decision a board makes. Visory Insights is the layer on top that turns the clean numbers into direction. If you’d like to see what your own books look like through this lens, get your free financial health check and we’ll walk through what moving to properly-structured accrual management books would look like for your organisation.