Every business keeps its books on one of two methods: cash or accrual. The choice affects when you record income and expenses, how your financials look, and sometimes your tax bill. Here is the difference and how to choose.
What is cash-basis accounting?
Cash-basis accounting records income when you actually receive the money and expenses when you actually pay them. It is simple and mirrors your bank account, which is why many small businesses start with it.
What is accrual accounting?
Accrual accounting records income when it is earned and expenses when they are incurred—regardless of when cash changes hands. It gives a more accurate picture of profitability, especially for businesses that invoice customers or carry inventory, and is required for many larger businesses.
Which method should your business use?
Very small, service-based businesses often do fine on cash basis. But if you invoice customers, carry inventory, run jobs over time, or plan to seek financing, accrual usually gives a truer picture—and lenders and investors expect it. Some businesses keep books on accrual and report taxes on cash, which we can manage.
We set your books up on the right method and can maintain both views when it helps. See our bookkeeping & accounting services.