Cash vs Accrual Accounting: Which Should My Small Business Use?
Cash accounting records income when money arrives and expenses when money leaves. Accrual accounting records income when you earn it and expenses when you owe them, whatever day the cash moves. Cash is simpler; accrual shows your real profit month by month, which is why lenders and investors usually ask for it. Your tax method is a separate decision to confirm with a tax professional.
What is cash accounting?
Cash accounting, also called the cash basis, records a sale when the customer's money lands in your account and an expense when you pay the bill. Your books move in step with your bank balance, so the method is easy to follow and keep up.
What is accrual accounting?
Accrual accounting records a sale when you earn it, usually when you deliver and invoice, and an expense when you receive the bill, even if you pay it next month. Money owed to you sits in accounts receivable; money you owe sits in accounts payable. Each month shows the income and costs that belong to it.
What does the difference look like in practice?
Say you finish a $10,000 project in March and the client pays in May. In March you also receive a $4,000 subcontractor bill, which you pay in April.
| Month | Cash basis | Accrual basis |
|---|---|---|
| March | Nothing recorded | $10,000 income and $4,000 expense: $6,000 profit |
| April | $4,000 expense: a $4,000 loss | No effect on profit; the bill is paid |
| May | $10,000 income: a $10,000 profit | No effect on profit; the invoice is collected |
Illustration only. Both methods end at the same $6,000 over the three months; they differ on when it shows up.
On a cash basis, March looks empty and April looks like a loss. On accrual, the profit shows in March, when you did the work.
What are the pros and cons of each method?
| What matters | Cash basis | Accrual basis |
|---|---|---|
| Effort | Simple to keep; follows the bank | More work: invoices, bills and month-end entries |
| Profit by month | Swings with when cash moves | Income and costs land in the month they belong to |
| What you owe and are owed | Not in the books | Shown in receivables and payables |
| Cash in the bank | Easy to see | Needs a cash flow statement or forecast alongside |
| Lenders and investors | Often not enough | Usually what they expect |
When do lenders and investors want accrual?
Lenders and investors usually want accrual financial statements, because they show whether the business is actually profitable and what it owes. Expect to be asked for them when you apply for a loan or line of credit, raise money or prepare to sell the business. If one of these is coming, switch early, so you have a history to show, not a single month.
What if my business holds inventory?
Inventory makes the choice matter more. Buy stock in one month and sell it over the next three, and cash books put the whole purchase in the month you paid: that month looks like a loss and the next ones look better than they are. Accrual books match each item's cost to the month it sells, as cost of goods sold, so you see your true margin by product. How inventory is treated on your tax return is a separate question for your tax professional.
Which method should I use for taxes?
Your tax accounting method is a separate decision from how you run your monthly reports, and one to confirm with a tax professional. In general, many smaller businesses below the IRS gross-receipts limit can choose the cash method for taxes, while larger businesses and some types of entity may be required to use accrual. Changing your tax method later can require IRS approval, so decide it deliberately. This guide is general information, not tax advice.
How does Korven handle cash and accrual books?
At Korven, a senior specialist keeps your monthly books on the method that fits your business and gives you accrual reports for decisions: a profit and loss, balance sheet and cash flow every month, with a plain-English summary of what changed. Books are reconciled and closed on a fixed calendar in QuickBooks Online or Xero, inside your existing setup. Korven prepares your books and tax file; our licensed CPA partner prepares, signs and files your return.
How pricing works. You pay one flat monthly fee, scoped to your books: transaction volume, the number of bank and card accounts, inventory, several companies and payroll. Your fee is confirmed in writing after a free review, before any work starts. Never hourly.
Payroll software such as Gusto is billed separately.
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See Bookkeeping & Payroll, Closed Every Month and The Month-End Close Checklist.
What else do people ask about cash and accrual accounting?
Is cash or accrual accounting better for a small business?+
Can I switch from cash to accrual accounting?+
Can I keep accrual books and file taxes on a cash basis?+
Do banks require accrual financial statements?+
How does Korven price monthly bookkeeping?+
Monthly books reconciled and closed on a fixed calendar, for one flat monthly fee.
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