Cash vs. Accrual Accounting: What’s the Difference & Which Is Right for You?
f you’re a small business owner sorting through your finances, you’ve probably heard the terms cash basis and accrual basis accounting. But what do they actually mean—and how do you know which one you should use?
Let’s break it down in a way that’s easy to understand.
🧾 What Is Cash Basis Accounting?
Cash basis accounting records income when you receive money and records expenses when you actually pay the bill.
Example:
You send an invoice to a client in March, and they pay you in April. You record the income in April, because that’s when the money hits your account.
It’s simple and perfect for businesses that:
Don’t carry inventory
Have fewer transactions
Operate on a “pay-as-you-go” model
Pros of Cash Basis:
✅ Easier to manage and understand
✅ Gives a clear picture of actual cash flow
✅ Great for new or very small businesses
Cons of Cash Basis:
❌ Doesn’t show money you’re owed or bills you haven’t paid yet
❌ Can give a misleading picture of long-term profitability
📊 What Is Accrual Basis Accounting?
Accrual accounting records income when it's earned and expenses when they’re incurred, regardless of when the cash actually moves.
Example:
You send that same invoice in March and get paid in April. With accrual accounting, you’d record the income in March, because that’s when you did the work and sent the invoice.
It’s a bit more complex, but it paints a more accurate financial picture—especially over time.
Pros of Accrual Basis:
✅ Shows the full picture of your income and expenses
✅ Matches income to related expenses for better reporting
✅ Required once your business passes $25M in revenue (IRS rule)
Cons of Accrual Basis:
❌ Can be harder to manage without bookkeeping help
❌ Doesn’t reflect your actual bank balance
💡 So Which One Should You Use?
Use Cash Basis if:
➡️ You’re a solopreneur or small service-based business
➡️ You want simplicity and mainly care about cash flow
➡️ You’re not yet earning over $25M per year
Use Accrual Basis if:
➡️ You invoice clients ahead of time or have large projects
➡️ You want a more accurate long-term view of profitability
➡️ You’re growing and need detailed financial reports
Final Thoughts
Both methods are valid and have their place. For many of my clients—especially service-based business owners like interior designers, wedding pros, or consultants—cash basis is easiest to manage when they’re just getting started.
But as your business grows, switching to accrual can help you make better financial decisions and prepare for taxes, funding, or scaling.
Need help getting your bookkeeping in order? Lets chat. Book a call here!
More information from the IRS- https://www.irs.gov/publications/p538
Disclaimer: This blog is for general informational purposes only and does not constitute financial or tax advice. I always recommend having a professional bookkeeper and tax strategist on your team to make decisions specific to your business.
