Understanding how your business recognizes income and expenses is one of the most important aspects of managing your financial health. The two main accounting methods—cash and accrual—determine when transactions are recorded in your books. Choosing the right one affects how you view profitability, plan your taxes, and manage your operations.
What is Cash Basis Accounting?
Cash basis accounting is the simpler of the two methods. Under this system, income is recorded when it is received, and expenses are recorded when they are paid. This method is commonly used by small businesses and sole proprietors because it closely tracks cash flow. You know exactly how much cash you have on hand because your books reflect the actual movement of money.
Example: If you invoice a client in March but they don’t pay until April, the revenue is recorded in April under the cash basis method.
What is Accrual Basis Accounting?
Accrual accounting is more complex but provides a more accurate picture of your business’s financial performance. In this method, income is recorded when it is earned (not necessarily when it is received), and expenses are recorded when they are incurred (not when they are paid).
Example: If you invoice a client in March, you record the revenue in March, even if payment isn’t received until April. Similarly, if you receive a bill in March but pay it in April, the expense is still recorded in March.
Key Differences Between Cash and Accrual
The main difference is timing. Cash basis reflects actual cash flow, while accrual provides a more complete financial picture by matching income with related expenses.
Cash Basis
– Easier to maintain
– Ideal for businesses with simple operations
– Better for short-term decision-making
Accrual Basis
– Required by GAAP (Generally Accepted Accounting Principles) for larger businesses
– Gives a more accurate view of profitability
– Essential for businesses with complex transactions or inventory
Why This Decision Matters
Your choice of accounting method affects how you interpret your revenue and expenses. It also impacts your tax liability, loan applications, and even investor confidence.
For example, if your business collects large deposits for future work, using the cash method may make your income look inflated. On the other hand, the accrual method ensures that your income and expenses are matched to the time periods they relate to.
Switching Between Methods
If you start with one method but realize it no longer fits your business, you can switch. However, switching methods requires IRS approval and adjusting how you report income and expenses.
Consulting with a professional bookkeeper or accountant is strongly recommended before making this change, as it can involve significant adjustments to your past and current books.
How SkyBridge Bookkeeping Can Help
At SkyBridge Bookkeeping, we help small business owners understand their accounting options so they can make informed decisions. We’ll evaluate your business type, cash flow needs, and long-term goals to help determine whether cash or accrual accounting is best for you. We’ll also assist with proper setup and reporting in QuickBooks Online or any other accounting software you use.
Final Thoughts
Choosing between cash and accrual accounting isn’t just a technicality—it’s a strategic decision. The right method can improve your financial visibility, ensure compliance, and help you grow with confidence. Whether you’re just starting out or reconsidering your current approach, we’re here to help every step of the way.
