Use cash basis for simple businesses with low receivables/inventory and when you want straightforward cash tracking. Use accrual basis for businesses with inventory, significant receivables/payables, or when seeking lenders/investors — accrual gives a more accurate picture of performance.
On the go? Listen on The Deep Dive — where we dig deeper into this topic: ‘Cash vs. Accrual—The Small Business Accounting Choice That Determines Your Taxes, Profits, and Payroll’. Listen or download.
Why this choice matters
Choosing cash vs accrual affects tax timing, performance reporting, and how you measure profitability. The wrong choice can mislead management, distort margins, and complicate tax filings. Many small businesses start on cash and switch to accrual as they grow or take on inventory. Consider your reporting needs, tax election rules, and lender requirements.
A quick story
A growing services firm tracked revenue on a cash basis and saw great monthly profits when large retainer checks were received. However, when several clients delayed payments, they faced a cash crunch despite ‘profitable’ months. After switching to accrual reporting for management (while keeping cash for tax), the owner gained visibility into true receivables and adjusted billing terms to stabilize cash flow. The change prevented a costly missed payroll situation the next quarter.
Definitions & simple examples
- Cash basis: Record income when cash is received and expenses when cash is paid. Simple and tax-friendly for many small business owners.
- Accrual basis: Record income when earned (invoice date) and expenses when incurred (bill date), regardless of cash movement. Required under GAAP for larger entities and for businesses holding inventory.
Quick examples
Invoice of $10,000 issued in Dec, paid in Jan:
• Cash basis: revenue recorded in Jan (when cash received).
• Accrual basis: revenue recorded in Dec (when earned).
Purchase of supplies invoiced in Dec, paid in Jan:
• Cash basis: expense recorded in Jan.
• Accrual basis: expense recorded in Dec.
Pros & cons — at a glance
Cash basis Pros: Simple, aligns with cash flow, easier for tax planning for many small owners; Cons: Can misstate profitability when receivables/payables are large, not GAAP-compliant for larger entities.
Accrual basis Pros: Accurate matching of revenue and expenses, better for performance measurement and investor/lender needs; Cons: More complex, requires tracking receivables/payables and possible tax complexity (though tax rules allow hybrid elections).
When to use cash basis
- Very small service businesses with minimal inventory and few receivables.
- Owners who prefer tax/timing simplicity and straightforward cash visibility.
- Businesses below IRS gross receipts limits for cash accounting (check current IRS thresholds).
When to use accrual basis
- Businesses with inventory (retail, e-commerce, wholesale).
- Companies with significant accounts receivable or accounts payable.
- Businesses seeking loans, investors, or that plan to scale and need GAAP-like reporting.
Tax & compliance notes
Tax rules differ by jurisdiction. In the U.S., the IRS allows many small businesses to use cash accounting, but businesses with inventory typically must use accrual or a hybrid method. Changing accounting method may require IRS approval (Form 3115). Consult your CPA before changing methods.
How to switch from cash to accrual (practical steps)
- Talk to your CPA about tax implications and whether IRS consent is needed.
- Reconcile all outstanding receivables and payables; prepare opening adjusting entries.
- Review inventory accounting and cost of goods sold if applicable.
- Update accounting software settings (QuickBooks/Xero have methods and closing date options).
- Run parallel reporting for 1–3 months to compare cash vs accrual views.
- Document the change and maintain mapping files for audit trails.
Worksheet — Cash vs Accrual decision table
Answer these prompts to decide which method fits your business. Copy into a spreadsheet and tally scores: more ‘Accrual’ answers suggest accrual accounting.
| Question | Yes/No | Notes |
| Do you hold inventory or sell physical goods? | ||
| Do you have monthly invoices/AR that often push cash receipt into later periods? | ||
| Do lenders or investors require accrual-based financials? | ||
| Do you need detailed matching of revenue and expenses for performance decisions? | ||
| Is your business above local tax thresholds for cash accounting? |
CSV copy (paste into a sheet)
Question,Yes/No,Notes
Do you hold inventory or sell physical goods?,,
Do you have monthly invoices/AR that delay cash receipts?,,
Do lenders or investors require accrual-based financials?,,
Do you need matching of revenue and expenses for decisions?,,
Is your business above local tax thresholds for cash accounting?,,
Here’s a ready-to-use CSV you can open in Google Sheets or Excel.
Download the CSV — Cash vs Accural Worksheet
Journal entry examples
Accrual revenue recognition (invoice issued, not yet paid):
• Debit Accounts Receivable $10,000
• Credit Sales $10,000
Accrual expense recognition (bill received, not yet paid):
• Debit Expense $1,200
• Credit Accounts Payable $1,200
FAQs
Q: Can I use cash for taxes and accrual for management?
A: Yes — many small businesses use cash basis for tax and accrual for internal reporting, but you should consult a CPA for implications.
Q: Will switching to accrual increase my taxes?
A: Switching methods can affect the timing of taxable income. Consult your CPA to model the impact.
Q: Does QuickBooks handle both methods?
A: Yes — QuickBooks and Xero can report on cash and accrual bases; settings differ by report (accrual = default for many reports).
Having difficulties figuring it out? Contact GTB for a free evaluation of your books.
What have you got to lose?
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