Cash vs Accrual Accounting: Which Method Fits Your Small Business?

Every set of books uses an accounting method, whether or not the owner chose it on purpose. The two main ones are cash and accrual. The choice decides which month a sale or a bill lands in, and that changes how your profit looks.

What is cash basis accounting?

Under the cash method you record revenue when you receive payment and record an expense when you pay it. If you finish a job in March and the customer pays in April, the income belongs to April. It is simple to follow because it mirrors your bank account.

What is accrual basis accounting?

Under the accrual method you record revenue when you earn it and expenses when you incur them. Finish the job in March and send the invoice, and March gets the income, with an amount owed to you on the balance sheet. Receive a supplier bill in March and pay it in April, and March gets the expense, with an amount you owe on the balance sheet.

A simple example

Cash vs accrual: the key differences

• Timing: cash follows payments. Accrual follows when work is done and costs are incurred.
• Accuracy of monthly profit: accrual matches income to the costs of earning it. Cash can make a month look much better or worse than the work you actually did.
• Complexity: cash is easier. Accrual needs accounts receivable, accounts payable and period-end adjustments.
• Cash visibility: cash basis shows cash in the bank more directly. Accrual needs a separate look at receivables and payables to see cash timing.

Which method fits your business?

Many small service businesses and freelancers run on the cash method because it is simple, and it can fit well when you are paid at the time of service. Businesses that invoice on terms, carry inventory, or bill in stages usually get a more useful picture from accrual. Contractors are a good example: progress billing and retainage make cash-basis numbers swing from month to month, which is why construction bookkeeping relies on job costing and work in progress. Stores with inventory face the same issue, covered in retail bookkeeping, and so do ecommerce sellers with payout delays from marketplaces.

Taxes and the method you choose

Your tax method generally has to follow IRS rules, and some businesses, including many with inventory, have extra requirements. Changing methods usually needs to be done correctly, and sometimes needs IRS approval. Check with your CPA before you switch. Our guide to small business tax deadlines covers the calendar side, and bookkeeping vs accounting explains where a bookkeeper and a CPA each fit.

Keeping your books on the right method

The method matters less than being consistent and having clean records behind it. Your accounting software can show reports on either basis, and your bookkeeper can set up receivables and payables correctly if you need accrual. See how our monthly bookkeeping works in your own QuickBooks or Xero file, or talk to a Mispar bookkeeper and check pricing.

Frequently asked questions

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