When it comes to managing your business finances, there’s a decision every entrepreneur has to make sooner or later:
Should I use cash or accrual accounting?
If that question makes your eyes glaze over—you’re not alone. But choosing the right accounting method is more than just a technicality. It can impact how you understand your money, how you pay your taxes, and how confident you feel about your business overall.
At Your Bookkeeper On Call, we help business owners simplify their finances through live, on-demand bookkeeping, accounting services, and DIY coaching. And in this post, we’re breaking down cash vs accrual accounting in plain English—so you can decide what’s right for you.
What Is Cash Basis Accounting?
Cash basis accounting is the simpler of the two methods.
You record:
- Income when the money actually hits your bank account
- Expenses when you physically pay the bill
Example:
You send an invoice to a client on September 1, but they don’t pay you until October 10.
👉 With cash accounting, you record that income in October, when the cash is received.
Pros:
✅ Simple to use and understand
✅ Great for tracking real-time cash flow
✅ Ideal for solopreneurs and very small businesses
✅ Often allowed by the IRS for businesses under $27 million in revenue (most small businesses qualify)
Cons:
🚫 Doesn’t show money owed or expected
🚫 Can make your business look artificially strong or weak
🚫 Less accurate financial picture over time
What Is Accrual Basis Accounting?
Accrual accounting records income and expenses when they are earned or incurred, not when cash changes hands.
Example:
Using the same invoice scenario—if you send an invoice on September 1 and get paid October 10,
👉 With accrual accounting, you record that income in September, when it was earned.
Pros:
✅ Provides a clearer, long-term view of your finances
✅ Tracks accounts receivable and payable
✅ Required by the IRS for some larger businesses
✅ Better for budgeting, forecasting, and scaling
Cons:
🚫 More complex to manage
🚫 You could “look profitable” on paper while cash is tight
🚫 Typically requires a more robust bookkeeping system
So, Which One Is Right for Your Business?
The right method depends on your business size, goals, and how you prefer to manage finances.
Here’s a quick guide:
| Business Type | Recommended Method | Why |
|---|---|---|
| Solopreneurs / freelancers | Cash | Simple, easy to manage, tax-friendly |
| Service-based businesses with low overhead | Cash or Accrual | Cash is fine unless you have lots of unpaid invoices |
| Product-based businesses / inventory | Accrual | Required for inventory-heavy businesses |
| Scaling businesses | Accrual | Better long-term financial visibility |
| Nonprofits or funded startups | Accrual | Often required by funders or auditors |
✨ Pro Tip: You can start with cash basis and switch to accrual later as your business grows.
🧾 What About Taxes?
The IRS lets most small businesses choose their accounting method for tax reporting, but once you pick one, you need to stick with it—unless you file a formal request to change.
Also, remember:
- The method you use for internal bookkeeping doesn’t have to match your tax reporting method—though it’s simpler if they do.
- Some business owners use hybrid methods, but these require careful setup and aren’t IRS-compliant for reporting unless specified.
If you’re not sure what the IRS requires for your specific business, don’t worry—we help clients navigate that all the time.
Still Not Sure Which One to Choose?
That’s where Your Bookkeeper On Call comes in.
We offer:
- ✅ Live, on-demand bookkeeping and accounting help when you need it
- ✅ Coaching for DIY business owners who want to learn the ropes
- ✅ Help with setting up (or switching) your accounting method the right way
🗂️ Whether you’re just getting started or ready to scale, having the right accounting foundation can save you money, time, and stress down the road.
Final Thoughts
Cash accounting is simple, flexible, and great for many small businesses.
Accrual accounting gives you a deeper understanding of your business’s financial health.
The key is choosing the one that aligns with your goals—and getting the support you need to make it work.
Ready to choose the right method for your business?
Let us help.
👉 Book your free consultation with Your Bookkeeper On Call and get expert, no-fluff advice tailored to your business.
