Cash accounting records income and expenses when money moves. Accrual accounting records them when earned or incurred. Cash is simpler, while accrual gives a more accurate picture for businesses with invoices, inventory or larger operations.
1Cash basis in plain words
You record income when you are paid and expenses when you pay them. It is simple and easy to understand, and it matches your bank balance.
2Accrual basis in plain words
You record income when you earn it, even if the customer has not paid, and expenses when you incur them, even if you have not paid yet. This shows what your business really earned in a period.
3A simple example
You finish a job in December and are paid in January. On a cash basis the income belongs to January. On an accrual basis it belongs to December, when the work was done.
4How to choose
- Cash: very small, simple businesses with few invoices
- Accrual: businesses that invoice customers, carry inventory or need to track what is owed
- Lenders and larger customers may prefer accrual reports
The method you use for taxes may be limited by rules and by your business. Confirm it with your CPA before you switch.
5Switching methods
Changing methods affects how income and expenses are recorded and may require tax filings. Do not switch without advice from your tax professional. Once the decision is made, we set up the books to match.
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