Cash vs. Accrual Accounting: Which One Is Right for You?

When it comes to bookkeeping, there’s one choice every business owner has to make (whether they know it or not): Cash basis or accrual accounting.

If those terms sound like accounting-speak, don’t worry — we’re going to break it down so you know exactly what each method means, how it affects your books, and which one is right for your business.

What’s the Difference?

Cash Basis Accounting

With cash basis accounting, you record income when you get paid, and expenses when you pay them.

Simple Example:

• You invoice a client on March 20

• They pay you on April 5
  → You record the income in April, when the money hits your account.

✅ Easy to understand
✅ Great for small, cash-based businesses
❌ Doesn’t show the full financial picture

Accrual Accounting

With accrual accounting, you record income when you earn it and expenses when you incur them, even if the cash hasn’t moved yet.

Same Example:

• You invoice a client on March 20

• They pay on April 5
  → You record the income in March, because that’s when you earned it.

✅ More accurate long-term view
✅ Required once you hit a certain size (by the IRS)
❌ More complex to manage

Which One Is Right for You?

👍 Choose Cash Basis If…

• You’re a solo operator or small service business (like a cleaner, handyman, or inspector)

• You want a simple way to track income and expenses

• You primarily get paid at the time of service or shortly after

• You’re not carrying accounts receivable (outstanding invoices) or accounts payable (unpaid bills)

Cash basis is the go-to for most small businesses, and it’s what many choose when using software like QuickBooks Online.

📈 Choose Accrual Accounting If…

• You invoice clients and don’t get paid for 30+ days

• You carry inventory or have large ongoing projects

• You want a more accurate monthly view of profits

• You plan to grow, get financing, or eventually hire a CPA or CFO

Accrual accounting is required by the IRS for businesses over $27 million in annual revenue (most small businesses don’t need to worry about that), but even small businesses sometimes opt in if it helps them plan better.

Tax Tip

The method you choose impacts when you pay taxes on income.

• With cash basis, you only pay taxes on money you've actually received.

• With accrual, you could owe taxes on income before it’s hit your bank account.

This is a big reason many small business owners stick with cash basis — it keeps cash flow simpler.

Can You Switch Between the Two?

Yes — but not casually. You’ll need to:

• Adjust your records

• Possibly file a form with the IRS (Form 3115)

• Consider the tax implications

Always talk to a bookkeeping pro or tax advisor before switching methods.

Final Thoughts

If you’re just getting started, running a lean service-based business, and want something simple: cash basis is probably perfect for you.

If you’re scaling, managing lots of invoices and bills, or want to analyze your business month-to-month: accrual might be the smarter play.

Still not sure what’s best for your business?
I offer a free Bookkeeping Health Check to help you figure out the best tools, methods, and setup based on how you run your business.

Contact us by clicking the link here

Or send us an email at David@RuckandReconcile.com

Check out our services here

And as always, thanks for reading!