Cash vs. Accrual Accounting: A Plain-English Guide for Business Owners

"Are your books on a cash or accrual basis?" It's one of the first questions a bookkeeper or accountant asks, and many owners aren't sure. The answer changes what your reports mean and how your bookkeeper works.

This guide explains the two methods in plain English. It's general bookkeeping information; which method your business must use for tax purposes is a question for your CPA. ExecWing does not provide tax or CPA services.

The core difference

• Cash basis: record income when you receive money and expenses when you pay them.
• Accrual basis: record income when you earn it and expenses when you incur them, regardless of when money moves.

An illustration

Hypothetical: You complete a $10,000 project in March, invoice the client in March and get paid in April. You also receive a $2,000 contractor bill for the project in March and pay it in April.

Same business, same transactions, very different monthly pictures.

Advantages of cash basis

• Simple. Your books mirror your bank account.
• Easy to understand. Income is money in; expenses are money out.
• Less bookkeeping work. No need to track receivables and payables in the books, though you still need to manage them.

Disadvantages of cash basis

• Distorted performance. A month with large collections looks great even if little work was done; a month with heavy prepayments looks bad.
• Hidden obligations. Unpaid bills and uncollected invoices don't appear on the books.
• Harder comparisons. Month-to-month results swing with payment timing.

Advantages of accrual basis

• Matches income and expenses to the period they relate to, so profit reflects actual performance.
• Shows receivables and payables on the balance sheet.
• Better for decisions: pricing, hiring, budgeting.
• Expected by many lenders and investors, and required under US generally accepted accounting principles (GAAP) for financial statements prepared under GAAP.

Disadvantages of accrual basis

• More work. Requires recording invoices and bills when issued and received, plus period-end adjustments.
• Less intuitive. Profit doesn't equal cash, so you need a cash-flow view too.

Which method must you use?

Tax rules determine which methods a business is permitted to use for tax purposes, and there are thresholds and exceptions. Your books can sometimes be kept on one basis for management purposes and converted for tax reporting. Ask your CPA what's required and appropriate for you.

Modified approaches

Some businesses use a hybrid in practice — for example, cash basis for most items but recording major receivables or payables. Accounting software often lets you run reports on either basis from the same data if invoices and bills are entered. In QuickBooks Online, for example, many reports let you toggle between cash and accrual.

What your bookkeeper does differently

On cash basis

• Categorize deposits and payments as they clear the bank.
• Reconcile bank and card accounts.
• Track receivables and payables outside the books, or using invoice and bill features while reporting on cash basis.

On accrual basis

• Record customer invoices when issued (accounts receivable).
• Record vendor bills when received (accounts payable).
• Apply payments to open invoices and bills.
• At month-end, record adjustments as directed: accrued expenses for costs incurred but not yet billed, deferred revenue for payments received before work is done, prepaid expenses spread over the periods they cover, and depreciation.
• Reconcile receivable and payable balances to their aging reports.

See the month-end close checklist.

Signs you may want accrual reporting

• You invoice clients and wait weeks or months to get paid.
• You pay significant expenses in advance (annual software, insurance).
• You hold inventory.
• You're seeking a loan or investment.
• You want accurate monthly profit for decision-making.

Signs cash basis may be enough for management

• Most sales are paid immediately.
• Expenses are paid as incurred.
• The business is small and simple.

Even then, a cash-flow forecast is valuable.

Don't forget cash flow

Whichever method you use, profit is not cash. A profitable accrual-basis business can run short of cash if customers pay slowly. Ask your bookkeeper for:

• An accounts receivable aging report.
• An accounts payable aging report.
• A simple cash-flow forecast.

Questions to ask your CPA

1. Which method should my books use for management reporting?
2. Which method am I required or permitted to use for tax purposes?
3. If they differ, how should my bookkeeper prepare year-end books for you?
4. What month-end adjustments do you want recorded?

How ExecWing bookkeepers work

ExecWing bookkeepers keep books on the basis you and your CPA choose, in QuickBooks Online or Xero, and prepare clean books for your CPA. Dedicated bookkeeping is $2,100/month or $2,600 for senior; fractional packages are $450, $850 and $1,400/month. See bookkeeping and bookkeeper vs. accountant vs. CPA.

Switching methods

Moving your management books from cash to accrual is a project, not a toggle. Typically, your bookkeeper will enter open invoices and unpaid bills as of a start date, set up prepaid and deferred items your CPA identifies and then follow accrual procedures going forward. Changing your tax method is a separate matter with its own rules; your CPA handles that decision and any required filings.

Frequently asked questions

Can I see both views? Often yes. If invoices and bills are entered in your accounting software, many reports can be run on either basis.

Does accrual mean I pay tax on money I haven't received? That depends on your tax method, which may differ from your management books. Ask your CPA.

Quick answers

Which method do lenders prefer? Many lenders and investors ask for accrual-basis financial statements, but requirements vary. Ask the lender.

Key takeaways

• Cash basis records money when it moves.
• Accrual basis records income when earned and expenses when incurred.
• Accrual shows performance and obligations more accurately but takes more work.
• Your CPA decides which method is required for tax purposes.

The bottom line

Cash basis records money when it moves; accrual records income when earned and expenses when incurred. Cash is simpler; accrual shows true performance and obligations. Choose with your CPA, make sure your bookkeeper follows the chosen method consistently, and always keep an eye on cash flow.

If you're unsure which basis your books use today, ask your bookkeeper to run your last month's profit and loss both ways. The difference between the two reports will tell you a lot about how timing affects your numbers, and it's a useful starting point for a conversation with your CPA.