Accounting Methods
Cash vs. Accrual Accounting: Which Method Fits Your Business?
Cash or accrual? The method you choose changes when income and expenses hit your books, and sometimes your tax bill. Here's the difference.
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01Cash Basis Explained
Under cash accounting, you record income when money lands and expenses when you pay them. It's simple and mirrors your bank balance, which is why most small businesses start here.
02Accrual Basis Explained
Accrual records income when it's earned and expenses when they're incurred, regardless of when cash moves. It gives a truer picture of profitability over time.
03The Trade-Offs
Cash is simpler and helps with cash-flow visibility. Accrual is more accurate for businesses with inventory, receivables, or investors who want a real performance picture.
04Which method are you allowed to use?
Smaller businesses can generally choose, but past a certain size or with inventory, the IRS may require accrual. The rules are worth confirming before you commit.
05Switching Methods
You can change methods, but it requires IRS approval and careful handling. Choosing well upfront saves that hassle.
Common questions
What is the difference between cash and accrual accounting?
Cash accounting records income when money lands and expenses when they are paid. Accrual records income when it is earned and expenses when they are incurred, whichever way the cash moves. Cash mirrors the bank balance; accrual shows profitability over time.
Which method should a small business start with?
Most small businesses start on cash because it is simple and tracks the bank balance. Accrual fits once there is inventory, receivables or an investor who wants a true performance picture.
Can I switch from cash to accrual later?
Yes, but the change requires IRS approval and careful handling of the transition year. Choosing well at the start avoids that work.
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Schedule a ConsultationThis article is general information, not individualized tax, legal, or financial advice. Every situation is different. Reach out and we'll look at yours directly.