Two profit figures, one business, the same twelve months of trading. One comes from the seller's summary statement, the other from the accounting software. They do not match.
That gap is rarely evidence of bad faith. It almost always traces back to one of three mechanics: cash versus accrual timing, GST treatment, or add-backs applied in the summary but never recorded in the ledger. Knowing which one is driving the difference is basic literacy for anyone reading financial statements Australia deals depend on during due diligence.
This post works through each cause. You will see how cash and accrual recognise income on different rules, including the June invoice paid in July that lands in two separate tax years. You will see why the GST method and the income tax method are separate elections, and how gross versus net presentation shifts what a business income statement appears to earn. You will see what it means when add-backs sit in a summary with nothing behind them in the accounts.
Then we apply a three-way test to sort cosmetic differences from material ones, and look at what verified financials change before you trust either number.
Two Profit Figures for One Business
Ask a seller for a profit figure and you will often get two. The summary profit statement, the number in the information memorandum, is built to show what a buyer could earn running the business. The ledger behind it is built to report to the ATO on the accounting method the entity has elected. Different jobs, different numbers.
The gap almost always comes down to one of three causes: cash versus accrual timing, GST treatment, or add-backs applied in the summary that never appear in the ledger. Name the cause and you know whether the difference is cosmetic or changes what the business is worth.
Two financial statements examples from the same industry, say two cleaning businesses on the same strip, can show different profit for the same year for exactly these reasons. Knowing what a healthy cleaning business's numbers should look like before you read either document makes the divergence easier to place.
The next sections work through each cause in turn.
Cause One: Cash Versus Accrual Timing
The first of the three is method. Under cash accounting, income is recorded when the money arrives and expenses when they are paid. Under accrual, income is recorded when it is earned, normally when invoiced, and expenses when they are incurred, normally when the bill is received.
The ATO's test for which method applies is appropriateness, set out in TR 98/1 and grounded in section 6-5 of the ITAA 1997. Cash suits income that comes mainly from personal labour or skill. Accrual suits a business holding trading stock or running a real debtor and creditor ledger. This defines which year income lands in.
The practical effect for a buyer: an accrual ledger can show profit from invoices the business has not been paid for yet. The bank account does not agree, and neither will a cash-basis summary.
Ask the seller which method the ledger runs on, and whether the summary uses the same one. Most gaps in this category collapse once that is on the table. Gaps that survive it are worth chasing through red flags in a business listing.
Why the Two Methods Recognise Income Differently
Whichever method the ledger runs on, the differences trace back to when each event is recognised.
Revenue. An invoice raised in June belongs to June under accrual. Under cash it belongs to the month the customer pays, even if that is July.
Expenses. A supplier bill received in June but paid in July sits in June under accrual and in July under cash.
Accrual-only items. Depreciation, prepayments, stock movements and work in progress appear in an accrual P&L and are invisible in a cash one.
Both statements can be correct on their own terms while reporting different profit for the same twelve months. Matching period and basis is the first step before comparing totals.
The June Invoice, July Payment Example
Take an illustrative example, not a real client. A tradesperson invoices $40,000 in June 2026 and is paid in July 2026. Under accrual, that $40,000 lands in 2025-26. Under cash, it lands in 2026-27.
Read the accrual ledger at 30 June and it shows profit the bank account does not. The work was done, the invoice was raised, the revenue is recognised, but no money has arrived.
Now put the seller's summary on the accrual figure and hand the buyer's lender a cash tax return. One business reports two profit numbers a month apart. Each answer is correct for the question it was asked. The gap reverses when the payment clears, which is what makes timing differences so easy to argue about and so rarely worth arguing about.
Cause Two: GST Treatment
GST runs on its own election. A business can report GST on a cash basis and income tax on accrual, or the reverse. The two are chosen independently, and a seller's file often runs one of each.
Cash basis for GST generally applies under $10 million aggregated turnover, with non-cash at or above it unless the ATO permits otherwise. The ATO's GST reporting methods page sets out the current threshold.
Registration is compulsory at $75,000 GST turnover, or $150,000 for not-for-profits, within 21 days. Larger businesses lodge monthly BAS rather than quarterly, whether by turnover or ATO direction.
GST turnover is not profit. It counts taxable and GST-free sales, excludes input-taxed supplies, and strips out GST itself. Adjustments and a different accounting method pull the BAS figure further from revenue, so net GST is never a fixed fraction of sales. A business turning over $1,000,000 can owe very little or a great deal, depending on its mix.
Ask which method the BAS is lodged on and whether the summary's revenue is GST inclusive or exclusive before comparing a line. That basis check sits early in the step-by-step guide to selling a business in Australia.
Gross Versus Net in a Business Income Statement
The method election decides when GST is accounted for; presentation decides how it shows up in the numbers. Revenue on a business income statement can be GST inclusive (gross) or GST exclusive (net). Only the GST exclusive figure lines up with the profit you value; GST collected is never the seller's money.
Take a line of $1,100,000 GST inclusive. At 10 per cent that becomes $1,000,000 exclusive. The $100,000 is tax collected for the ATO, not profit. If the summary strips GST and the ledger export does not, revenue reads about 10 per cent higher without the business earning a dollar more.
Check both documents for the label: inclusive or exclusive, and whether the selling entity is registered for GST at all. An unregistered seller has no GST to strip, so a summary that deducts it misstates profit in the other direction. Settle the basis before you evaluate a real business opportunity in Australia.
GST Method and Income Tax Method Are Two Different Elections
That basis is only one election. GST and income tax run on separate ones, so two businesses with identical sales can report different GST for the same quarter because one chose cash and the other did not. A cash basis GST business pays GST when it collects, so a large June debtor pushes that liability into the September quarter and flattens the apparent margin in June. Those elections also shape the sale itself, which is where the small business CGT concessions and the 2027 rule change enter.
Australian financial statements do not always state the GST basis on the face of the statement. Ask for the BAS alongside the P&L and read the method from the BAS.
One case should stop a deal: a summary that applies cash to revenue and accrual to expenses, or the reverse. Rebuild it before you value anything.
Cause Three: Add-Backs in the Summary, Nothing in the Ledger
Method elections create timing differences. Add-backs are different: they appear in the summary and nowhere else.
An add-back is an adjustment in the summary that strips out an expense the owner says a buyer would not carry. A director's salary above market, a personal vehicle run through the company, one-off legal costs. The ledger records each one, because it was real and deductible for that entity. The summary removes it to show earnings under new ownership.
That is the whole mechanism, and it is why the two documents can never reconcile on this point. There is no accounting entry behind an add-back. There is only the summary's own schedule, so the ledger will never confirm it. Calling the result "normalised earnings" does not change that; the schedule still owes you the evidence.
This cause moves price more often than the other two, because an add-back changes the profit figure the multiple is applied to. Every dollar added back is a dollar multiplied.
Ask for a schedule listing every add-back, the ledger account it came from, and the document supporting it. If a line cannot be traced to a source document, model the business without it. When you follow how to buy a business in Australia, that traceability test does more work than any debate about what a buyer would spend.
The Three-Way Test: Cosmetic or Material
Once the add-back schedule is on the table, run the same four steps across every gap.
Name the cause. Write down whether it is timing, GST or an add-back. A gap that fits none of the three stays unexplained until it does.
Rebuild both numbers on one basis. Choose the basis you will value on, usually cash, GST exclusive, before add-backs, and convert the other document to it.
Size it. State the difference in dollars and as a percentage of profit. A number you cannot quantify cannot be negotiated.
Test whether it reverses. An invoice raised in June and paid in July reverses next period and rarely changes value. A different accounting method or an add-back does not reverse.
Cosmetic gaps vanish once both documents share a basis and a period. Material gaps survive that conversion and belong in your price negotiation. What Is My Business Worth? How to Value a Small Business shows how to apply that surviving figure to an industry multiple.
What Verified Financials Change
The three-way test gives you a method. What it does not give you is a trustworthy starting point, because in most listings the numbers you are testing were typed into a form by the seller or broker.
Bizzie changes that starting point. Sellers can connect their Xero account directly to a listing, so revenue and profit come from accounting data rather than a self-reported figure. The mechanics are set out in Bizzie's guide to how verified financials work.
A connected feed does not remove timing, GST or add-back differences. It removes one link: the manual entry where a figure is typed, rounded or restated. The file's basis still governs. Check whether the connected ledger runs cash or accrual, and whether figures are shown GST inclusive.
Buyers can compare listings built on the same source, and Bizzie's free instant valuation tool gives a starting range to test stated numbers against before you open a statement.
Before You Trust Either Number
Verified data removes the retyping problem, not the reconciliation one. Ask for the ledger export behind any summary you are given. A profit statement with no underlying data cannot be reconciled to anything, so there is nothing to test.
Fix the basis before you compare anything: cash or accrual, GST inclusive or GST exclusive, before or after add-backs. Two documents built on different bases will never match, and the mismatch says nothing about the business.
Put every unexplained difference in dollars on one page. Make the seller account for each line, in writing, with the source document behind it.
Then apply the only test that matters to your offer. A difference that reverses, such as an invoice paid a few weeks later, is noise. A difference that persists across periods is price. Only the second one should move what you pay.
Conclusion
Three causes explain most mismatches between a seller's P&L and the accounting software: cash versus accrual timing, GST treatment, and add-backs that live in a summary but never in the ledger. Each is a basis problem, not a lie.
Fix the basis before you compare anything. Cash or accrual, GST inclusive or exclusive, before or after add-backs. Then ask for the ledger export behind any summary you are handed.
A difference that reverses is noise. A difference that persists across periods is price, and only that one should move your offer.
Bizzie's guide to how verified financials work explains what changes when the source is traceable, and the free instant valuation tool gives you a starting range to test against stated numbers. Get the basis right, and you can price the gap instead of arguing about it.