Cash-basis and accrual are the two main methods for recording your income and expenses, and the one you use changes how your financial picture looks. The difference comes down to a single question: when do you record the money?
Cash-basis accounting
With cash-basis accounting, you record income when the money actually lands in your account, and expenses when you actually pay them. It follows your bank account. It is simpler to manage, which is why many small businesses and startups start here.
Accrual accounting
With accrual accounting, you record income when it is earned and expenses when they are incurred, whether or not the cash has moved yet. If you send an invoice, the income counts now, not when the customer pays. Accrual takes a bit more work, but it gives a more accurate picture of how the business is really doing.
A simple example
The same $2,000 invoice, two methods
You finish a job and send a $2,000 invoice in December. The customer pays you in January.
Cash-basis: you record the $2,000 in January, when the payment arrives.
Accrual: you record the $2,000 in December, when you earned it.
Same money, different month, different picture. Multiply that across a busy business and the two methods can tell noticeably different stories about a given month.
Which method should you use?
Cash-basis is simpler and works well for many small, straightforward businesses. Accrual gives a truer picture and becomes important as you grow, carry inventory, or invoice on terms. Some businesses are also required to use accrual once they pass a certain size.
Because the method you choose has tax implications, and some businesses are required to use a particular one, the final call is worth confirming with your CPA or tax preparer. Coastal keeps your books accurately in whichever method fits your business.
Frequently asked questions
Which is better for a small business?
For many small businesses, cash-basis is simpler and perfectly adequate early on. Accrual is the more accurate method and often the right move as you grow. The best choice depends on your size, how you bill, and your tax situation.
Can I switch methods later?
Yes, though switching has tax and reporting implications, so it is done deliberately and usually with your CPA’s input. Your bookkeeper then keeps the records consistent with the method you choose.
Who decides which method I use?
You do, guided by your CPA or tax preparer, since it affects your taxes and some businesses are required to use accrual. Your bookkeeper then records everything correctly under that method.
Where Coastal fits in
Coastal Bookkeeping keeps your books clean and accurate under whichever method fits your business, so your financial statements tell the truth. Coastal handles the bookkeeping. Your CPA handles the taxes.
Written by
Selena Sagalow
QuickBooks Online ProAdvisor · ADP Certified · Xero Certified · 10+ years
Selena runs Coastal Bookkeeping, a U.S.-based virtual bookkeeping company serving small businesses and nonprofits. When you hire Coastal, you work directly with her.