Cash vs. accrual accounting: which fits your small business?
There are two basic ways to keep books: cash basis and accrual basis. The difference is simply when you record income and expenses. It sounds technical, but once you see an example it clicks, and choosing the right one can make your numbers much more useful.
Cash basis: when the money moves
On a cash basis, you record income when money lands in your account and expenses when money leaves it. That's it.
Example: You finish a $2,000 job on March 28 and send an invoice. The customer pays on April 10. On a cash basis, that $2,000 is April income, because April is when you got paid.
Cash basis is popular with small businesses because it's intuitive. Your books look a lot like your bank account, and you pay attention to the thing that keeps the lights on: actual cash.
Accrual basis: when it's earned or owed
On an accrual basis, you record income when you earn it and expenses when you owe them, no matter when the money moves.
Same example: You finished the job in March, so the $2,000 is March income. Until the customer pays, it sits in “accounts receivable,” money people owe you. When the payment arrives in April, you simply mark the invoice as paid; it doesn't count as income a second time.
Expenses work the same way. If you get a $600 supply bill in March and pay it in April, accrual books show the expense in March, with the unpaid amount sitting in “accounts payable” until you pay.
Why the difference matters
Over a full year with steady business, the two methods often end up close. Month to month, though, they can tell very different stories:
- Cash basis can make a slow month look great (because several big customers happened to pay) or a busy month look terrible (because you did lots of work and haven't been paid yet).
- Accrual basis matches income with the work that produced it, so you can see whether a given month or job was actually profitable.
Which should you use?
Here's a practical way to think about it. This is general information, not tax advice, and your CPA should have the final say, especially on which method you use for your tax return.
Cash basis often fits if:
- Customers usually pay you on the spot or within a few days.
- You don't carry inventory.
- You want the simplest possible books.
Accrual basis often fits if:
- You invoice customers and wait weeks to get paid.
- You have significant bills you pay later.
- You want to know whether each month or project made money.
- You're planning to seek a loan or investors, who often prefer accrual statements.
Tax rules also play a part. In the US, many small businesses are allowed to use the cash method for taxes, but there are limits and exceptions, and the rules change from time to time. Ask your tax preparer what applies to you before you switch.
A common middle ground
Lots of small businesses keep their day-to-day eye on cash (“how much is in the bank?”) while also tracking unpaid invoices and bills. Even if you file on a cash basis, knowing who owes you money and what you owe is valuable. It's the difference between “we have $8,000 in the bank” and “we have $8,000 in the bank, $5,000 coming in from customers, and $3,000 of bills due next week.”
Can you switch later?
For your own management reports, yes. You can look at your numbers either way at any time if your software tracks invoices and bills properly. For tax purposes, changing methods usually involves a formal process, so talk to your CPA first.
The bottom line
Cash basis tells you what happened in your bank account. Accrual basis tells you what happened in your business. Both are legitimate. Pick the one that answers the questions you actually ask, confirm the tax side with a professional, and be consistent.
How Apsis helps
Apsis tracks your bank activity alongside your invoices and bills, so you can see your cash and what's owed in both directions on one screen. When a customer's payment lands, Apsis spots the deposit and marks the matching invoice paid. Try it free for 30 days.