Accrual vs Cash Accounting
Compare accrual and cash accounting methods — when revenue and expenses are recognized.
Overview
Cash accounting records transactions when money changes hands; accrual records them when earned or incurred regardless of payment. Cash is simpler and matches small-business intuition; accrual is required for larger businesses and gives a more accurate picture of profitability.
Choose Accrual Accounting when...
Use accrual if you're required (large company, public, GAAP investors) or want a more accurate picture of operating profitability.
Choose Cash Accounting when...
Use cash accounting if you're a small business and prefer simplicity — your books and bank account align cleanly.
Our Verdict
For most small businesses (under $30M revenue), cash accounting is allowed and easier — your books match your bank account. As a business grows, accrual becomes mandatory and gives a clearer picture of actual profitability by matching revenue to the period it was earned. The IRS allows most small businesses to choose; once chosen the method is hard to switch.
Frequently Asked Questions
What is the difference between Accrual Accounting and Cash Accounting?
Cash accounting records transactions when money changes hands; accrual records them when earned or incurred regardless of payment. Cash is simpler and matches small-business intuition; accrual is required for larger businesses and gives a more accurate picture of profitability.
When should I choose Accrual Accounting over Cash Accounting?
Use accrual if you're required (large company, public, GAAP investors) or want a more accurate picture of operating profitability.
When should I choose Cash Accounting over Accrual Accounting?
Use cash accounting if you're a small business and prefer simplicity — your books and bank account align cleanly.
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