When you’re managing a small business, one of the most important financial decisions you’ll make is how to track your income and expenses. That starts with choosing the right accounting method: cash basis or accrual basis.
Understanding the difference between these two methods is essential not only for compliance and reporting, but also for gaining a clear picture of your business’s financial health. In this post, we’ll break down the differences, pros and cons of each method, and how to choose the best one for your business.
What Is Cash Basis Accounting?
.Cash basis accounting records income when it’s received and expenses when they’re paid.
✅ Example:
If you invoice a client in March but they don’t pay until April, you record the income in April—the month you received the cash.
🔍 Pros:
- Simple to implement and maintain
- Gives a clear picture of how much cash you actually have on hand
- Great for very small businesses or sole proprietors
⚠️ Cons:
Not suitable for businesses that hold inventory or generate over $25M in revenue (per IRS rules)
Doesn’t reflect outstanding bills or invoices
Can give an inaccurate view of long-term profitability
What Is Accrual Basis Accounting?
Accrual basis accounting records income when it’s earned (even if you haven’t received payment) and expenses when they’re incurred (even if you haven’t paid yet).
✅ Example:
Using the same scenario—if you invoice a client in March, you record the income in March, even if they pay you in April.
🔍 Pros:
- Provides a more accurate financial picture
- Tracks income and expenses in the period they occur
- Better for long-term planning and budgeting
⚠️ Cons:
- More complex to manage
- Doesn’t track cash flow directly
- May require accounting software or professional help
Which Accounting Method Is Best for Your Business?
Here are a few guidelines:
- ✅ Cash basis is ideal if you’re a freelancer, solopreneur, or small service-based business with minimal expenses or inventory.
- ✅ Accrual basis is best if you’re growing, working with contractors/vendors, have accounts receivable/payable, or need to present financial reports to lenders or investors.
Still not sure which method to choose? That’s where working with a professional bookkeeper (like The Small Biz Doctor, LLC!) comes in. We’ll help you set up the best method for your industry, business size, and growth goals.
Final Thoughts
Choosing between cash and accrual accounting isn’t just a technical decision—it directly impacts how you view and manage your business finances. Whether you’re just starting or thinking about switching accounting methods, now is the perfect time to review your current setup and ensure it aligns with your financial goals.
Need help choosing the right method or setting it up in QuickBooks Online? Schedule a free consultation with us at The Small Biz Doctor, LLC—we make bookkeeping simple, stress-free, and strategic.
