Cash vs. Accrual Accounting: What It Is, How It Works, and Which One Is Right for Your Business

We hear the terms cash basis and accrual basis a lot, but often without context. Many business owners have a vague idea of what they mean, but they remain ideas when they could actually be used as reporting tools. 

Each basis impacts how your reports look and what they’re telling you. 

In this post, we’ll add some much-needed context to the cash vs. accrual accounting discussion, including what they are, why they matter, how they work in practice, and which fits your business. 

An important note on tax reporting: there are tax rules around the use of the cash vs. accrual basis. Discuss which is applicable to you with your tax professional. Some businesses choose to keep their internal reporting basis consistent with their tax reporting requirement. This post does not discuss the tax reporting basis, focusing instead on internal reporting. Tax reporting requirements can differ from what’s most useful for managing your business internally.

What is cash accounting? 

Cash accounting (or cash basis) is a method of accounting where the focus is recording transactions when money moves. 

Let’s say you’re a consultant, charging monthly. Consider that you earn income by providing services throughout March, which you invoice on March 31st. Your invoice may not be paid for a few weeks; say the cash hits your bank account on April 25th. 

Reporting on a cash basis means you’ll record income earned in March on April 25th, when cash was received.

Similarly, you record expenses not necessarily when the item or service is received, but when you pay for it, and cash leaves your bank account.

This is often the most intuitive method of bookkeeping because we tend to think not in accruals, but in cash in and out on a day to day basis. 

Cash accounting is a simple way to manage your records without having to track accruals, making it ideal for smaller, low-complexity businesses. 

It also has some limitations (discussed below), which accrual accounting can help address. 

What is accrual accounting?

Accrual accounting (or accrual basis) is a method of accounting where the focus is recording transactions when the work really happens. 

Accrual accounting doesn’t ignore cash; it simply marks when a transaction has actually occurred. An accrual is an adjustment that records revenue when it is earned and expenses when they are incurred. It may include an adjustment to accounts receivable or accounts payable, indicating that cash is expected to move in the future. 

To illustrate, consider our consulting example above. Under accrual accounting, the income from services provided in March would be recorded as income earned in March. The books would also show cash from that income as receivable in a future period. 

The accrual basis is more complex than the cash basis, but it also gives business owners a clearer picture of profitability, especially when timing is relevant: when matching income to expenses, or evaluating cause (e.g. a marketing campaign) to effect (e.g. increasing sales), for example.

Accrual accounting helps you get a stronger sense of profitability, trends, and real-time performance, making it a logical choice for growing or more operationally complex businesses. 

Should I use cash basis or accrual basis for internal reporting?

Your goals will determine whether to use cash or accrual accounting internally. 

If your goal is sheer simplicity, then you could:

1. Report on a cash basis if your business is very simple and there is little time between income earned/expenses incurred and cash moving. 

2. Report on the same basis you use for tax purposes. This will reduce any confusion from switching between the two. 

But the degree of simplicity is only one factor — you may also want to consider how you intend to use the data, and how it works with the nature of your business. 

Many small businesses start out using cash accounting, so let’s consider the limitations of using the cash basis in more depth.

Why reporting on a cash basis can be misleading

Reporting on a cash basis helps you stay cognizant of your business’s cash flows, which can help you manage cash effectively and avoid unforeseen cash constraints.

But when your business has significant timing differences between income earned/expenses incurred and cash received/paid, this can distort your reported profit, making it difficult to understand how your business is truly performing. 

Timing differences can result from delays in invoicing, or delays in payments — even if payment delays are within the terms of sale or purchase. 

This is when an accrual basis makes sense. 

When accrual accounting starts to make more sense for your business

Accrual accounting becomes more appropriate when cash reporting on its own is distorting your financial performance. This is most common when: 

• There’s a gap between services provided and invoices issued to customers

• You have bills or vendors you pay after the work is done

• You carry inventory (the IRS may require accrual based reporting)

• You want more accurate internal reporting to assess business performance 

• You issue external financial statements (for example, to lenders or investors)

Switching to accrual accounting doesn’t mean ignoring cash flows, though. Under accrual accounting, you still manage cash through proper bank account reconciliations and financial statement reviews (including the statement of cash flows). 

You can also use cash and accrual reporting together for deeper insight.

How to use cash and accrual accounting together

Cash and accrual reporting can be used together to add more context to your business’s financial performance, as long as you use each intentionally. 

Before applying this method, it’s important to feel comfortable with what cash accounting is showing you (where and when money is moving), and what accrual accounting is showing you (how your business is performing in real time). 

QuickBooks and some other accounting software allow you to switch views between cash and accrual basis, and this is intentional. If you typically report on an accrual basis, but you want to see how your business’s monthly activity translates into movement of cash, you can switch to the cash basis view. This helps you see where and how your operations and cash flow are aligned. 

Although tax reporting requires a specific basis, your internal reports could be either — or both, so long as they’re useful to you. 

Quick summary: which basis for reporting should you use?

It’s not necessary to use both cash and accrual accounting together, unless you find it insightful. 

It’s also not necessary to report internally the same way that you report for tax purposes, although it can help with efficiency. 

For internal reporting…

Use cash basis when:

• Your business is very simple

• You’re paid immediately or close to service delivery

• There are minimal timing differences

• You prioritize simplicity

Use accrual basis when:

• There’s a delay between work and payment

• You carry inventory

• You issue invoices before payment

• You want accurate profitability reporting

• You’re working with lenders/investors

A reporting basis manager (and a second set of eyes)

If switching between reporting bases — or using both at the same time for deeper insight — feels valuable but overwhelming, this is a great checkpoint to consider partnering with an external bookkeeper. 

In addition to managing the complexities of accrual based reporting, a bookkeeper can act as a second set of eyes, helping you navigate and draw meaning from the internal reports so that you can make confident, informed decisions for your business. 

If that sounds ideal, you’re welcome to book a consultation with me for a free evaluation of your books. I look forward to meeting you and discussing how I can help bring clarity to the numbers.