Cash vs. Accrual Accounting: One Tells a Story, the Other Just Lists the Scenes
Let me take you behind the numbers for a minute.
As a bookkeeper, I get the following question more often than almost any other:
“What’s the difference between cash basis and accrual accounting—and which one should I be using?”
Fair enough. Because on the surface, both methods track income and expenses. Both are legal. Both will get you through tax season. But under the hood? They paint very different pictures of your business. So, let’s cut through the accounting fog.
Cash Basis: Simple, Snappy, and Sometimes Sneaky
Cash basis accounting is like a highlights reel. You only record income when it hits your bank account. You only record expenses when the money actually leaves. Easy? Yep. Clean? Mostly. Misleading? Sometimes.
Example:
You sell a $5,000 project in December but don’t get paid until January. On cash basis, that income doesn't exist until next year. Same with bills—you can owe $10,000 to a supplier, but until you pay it, it’s invisible in your books.
Cash basis accounting is used by solo entrepreneurs, small businesses with no inventory, and service-based folks who just want to “keep it simple”
Pros: Easy to track
Makes sense to your bank balance
Great for businesses that run on actual cash flow
Cons: Doesn’t show what you really earned (or owe)
Can make you look wildly profitable or completely broke, depending on timing
Not allowed for certain businesses by the IRS (more on that in a sec)
Accrual Accounting: The Full Story, Told in Real Time
Accrual accounting is more like a full-length feature film—no missing scenes.
You record income when it’s earned, not when it’s paid. You record expenses when they’re incurred, not when the cash exits your account.
Example:
That $5,000 job you invoiced in December? It hits your books in December, even if the client pays in March. The $10,000 vendor bill you haven’t paid yet? It shows up as a liability the moment you receive it.
Accrual basis accounting is used by growing businesses, anyone with inventory, companies aiming for a clearer financial picture.
Pros: Gives a more accurate view of your financial health
Helps with forecasting, planning, and attracting investors
Required by the IRS for businesses making over $27 million (and many others)
Cons: Can be confusing without proper software or a bookkeeper
You’ll see “profit” on paper even when your bank account is crying
Requires more effort (but hey, so does everything that works well)
So, Which Should You Use? It depends on your goals.
Want ultra-simplicity and operate on a small scale? Start with cash basis.
Need to see the big picture and plan for growth? Go accrual.
Here’s the gut-check question I ask clients:
“Do you want to run your business based on your bank balance, or based on what’s really happening?”
If it’s the latter, accrual is your friend. It’s messier up front, but far more insightful in the long run.
A lot of businesses default to cash basis because it feels easier. But that “easy” can hide problems: unpaid invoices, future tax headaches, missed financial trends.
Accounting isn’t just compliance—it’s a compass. Choose the method that helps you navigate, not just survive. And if you're still not sure? Ask your bookkeeper. That’s literally what we’re here for.
This information should never be taken as advice. Please talk to your bookkeeping and tax business professionals to discuss your individual situation. By the way, we’d love to partner with you on that! Give us a call or schedule your no-obligation consultation today, click here to book a call.
