Cash vs accrual in Xero: which basis your reports use and how to switch

Short answer: Xero records every invoice and bill on an accrual basis, and its Profit and Loss and Balance Sheet show accrual figures unless you ask for something else. On the Profit and Loss, Balance Sheet and several other reports you can change the accounting basis to Cash in the report’s settings. That only changes how the report is shown. It does not change your books, and it does not change how GST or VAT is worked out, which is a separate setting.

What the two bases mean

	Accrual basis	Cash basis
A sale counts	On the invoice date	When the customer pays
A supplier bill counts	On the bill date	When you pay it
An invoice that is part paid	In full, on the invoice date	Only the part paid, when it was paid
Depreciation	Included	Left out
Money owed to you and by you	On the Balance Sheet as receivables and payables	Not shown
Best for	How the business is really performing month to month	What actually came in and went out

Neither is wrong. Accrual tells you whether the work you did this month was profitable. Cash tells you what happened in the bank. Most owners need both, and the difference between them is often the answer to “why is the bank lower than my profit?” (see profit in Xero but no cash in the bank).

A worked month

Made-up figures for a small service business in March, all excluding GST or VAT:

• Invoiced $30,000 of work in March; customers paid $18,000 of it in March.
• Customers also paid $8,000 of February invoices in March.
• Entered $12,000 of supplier bills in March; paid $9,000 of them in March.
• Also paid $4,000 of February bills in March.
• Paid $10,000 of wages in March.
• Depreciation on equipment: $1,000 a month.

March	Accrual	Cash
Income	$30,000	$26,000 ($18,000 + $8,000)
Supplier costs	−$12,000	−$13,000 ($9,000 + $4,000)
Wages	−$10,000	−$10,000
Depreciation	−$1,000	not included
Net profit	$7,000	$3,000

Same business, same month, two honest answers. The accrual view says March’s work earned $7,000. The cash view says $3,000 more came in than went out, mostly because $12,000 of March invoices are still unpaid. If that $12,000 gets paid in April, April’s cash view will look better than April’s work deserves. That swing is why cash-basis profit is a poor guide to how the business is trending, and why the money still owed to you deserves its own check (see who owes me money?).

How to switch a report to cash basis in Xero

1. Open the report, for example Reporting > Profit and Loss (Accounting > Reports in Xero’s older menu).
2. In the report’s settings or options, find Accounting basis and choose Cash instead of Accrual.
3. Update the report. To compare, run it again on accrual for the same dates, or export both.

The basis applies to the report you are looking at. Your saved reports and the rest of Xero carry on as before. If you use the Xero mobile app, the Profit and Loss screen has its own reporting preferences where the basis can be set.

The traps on cash basis

• Manual journals show by default. Each manual journal has a “Show journal on cash basis reports” box, ticked unless you untick it. Accrual adjustments such as prepayments or accrued expenses entered as journals will appear in a cash report unless the box was unticked, which can make the cash view wrong.
• Depreciation disappears. Cash basis reports leave out depreciation, so cash-basis profit looks higher than the business’s real cost of using its equipment (depreciation in Xero explains the line).
• Some movements never appear on either. Loan repayments, owner drawings, buying equipment and paying GST or VAT do not reduce profit on either basis. To see every pound or dollar that left the bank, use the Statement of Cash Flows or the Bank Summary report.
• Unreconciled bank lines. A payment only counts on a cash report once it is recorded against the invoice or bill. If the bank feed is behind, the cash view is behind too.

Does this change my GST or VAT?

No. Choosing cash on a report does not change how tax is calculated. In Xero, the basis for GST or VAT returns is set separately in your tax or financial settings (for example the GST accounting method in Australia, payments or invoice basis in New Zealand, compared in the Xero GST return guide, or the VAT Cash Accounting Scheme in the UK, covered in the Xero VAT return guide), and which one you are allowed to use depends on your registration and turnover. Which basis your income tax return uses is also a separate question. Ask your accountant before changing any of these, because switching basis part way through a period can count income or costs twice, or miss them.

Which one to look at each month

• Accrual Profit and Loss for whether the business made money, compared with last month and the same month last year. If the report is hard going, start with how to read your Profit and Loss in Xero.
• Cash in the bank and the cash you have coming in and going out for whether you can pay what is due. The free cash runway calculator turns your cash and monthly costs into how many months it lasts.
• The gap between the two, when it is large. The free profit but no cash explainer shows where the difference went, biggest first, without connecting Xero.

Common questions

Should a small business use cash or accrual? For your own monthly reports, accrual, because it matches each month’s sales with that month’s costs. Cash basis reports are a useful second view. Which basis you can use for GST, VAT or income tax depends on your country, your turnover and your registration, so that choice belongs with your accountant.

Why is my cash basis profit higher than my accrual profit? Usually one of three things: customers paid invoices from earlier months, you have bills entered that you have not paid yet, or depreciation, which cash basis leaves out. In the worked month above it went the other way ($3,000 cash against $7,000 accrual) because $12,000 of March invoices were still unpaid.

Why is a customer payment counted as income twice? If a payment in the bank feed is reconciled as a new Receive Money transaction coded to sales, instead of being matched to the customer’s invoice, Xero records the sale twice: once on the invoice and once on the payment, and the invoice stays open as unpaid. Match payments to the invoice they pay. The bank reconciliation report and aged receivables help find these.

Is a cash basis Profit and Loss the same as a cash flow statement? No. A cash basis Profit and Loss only shows income and expenses as they are paid. Loan repayments, owner drawings, equipment purchases and GST or VAT payments are not on it, so it can show a profit in a month when the bank balance fell. The Statement of Cash Flows shows every movement in the bank.

How do prepayments such as a year of insurance show? On cash basis the whole amount counts in the month you pay it. On accrual it also lands in that month if the bill is coded straight to an expense account. Your accountant may spread it across the months it covers with a prepayment journal (how to set one up). On cash basis reports that journal shows too unless “Show journal on cash basis reports” was unticked (see the traps above).

Getting this without running the reports

ReportPilot reads your Xero figures and sends a short email every Monday in plain English. Sales and profit come from Xero’s standard (accrual) Profit and Loss, compared with last month and the same month last year, and the email puts the cash side next to them: cash in the bank against the end of last month, money owed to you that is past due, and bills due in the next two weeks. It asks Xero for read-only access, and there is a 14-day free trial with no card, then plans start at US$19 a month.