What is the difference between cash and accrual accounting, and which should I use?
Cash basis and accrual basis are two ways to record income and expenses in your books. The difference comes down to timing.
Cash basis means you record income when the money hits your bank account and expenses when you pay them. If you invoice a client in December but they pay in January, that income shows up in January. What you see in your books matches what you see in your bank account, which makes it easy to follow.
Accrual basis records income when you earn it and expenses when you incur them, regardless of when money changes hands. That December invoice counts as December income even if the check arrives in January. This gives you a more accurate picture of what the business actually earned during a given period.
For most owner-operated service businesses, cash basis works fine and is what most small businesses start with. The IRS allows cash basis for businesses with average annual gross receipts under $29 million, which covers nearly all small service businesses. It’s simpler to manage, and when your full-service bookkeeping is set up properly, cash basis gives you a clear view of your cash position at any time.
Accrual makes more sense as you grow, especially if you carry significant receivables or have large prepaid expenses. A landscaper who sends big invoices in the fall but doesn’t collect until spring might have a distorted view of profitability on cash basis. Accrual accounting shows you what you actually earned, not just what came in.
Some businesses are required to use accrual by the IRS, particularly if inventory is a material part of the operation. Most service businesses don’t fall into that category and have the flexibility to choose.
When we set up your books in QuickBooks Online, we configure them for the right method from the start. Getting this right at the beginning matters because switching later can get complicated and may require IRS approval. If you’re not sure which method fits your situation, reach out for a consultation. We can walk through how your small business bookkeeping should be set up based on how your business actually operates.
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