Cash vs Accrual Accounting for a Small Business
The difference between cash and accrual accounting, shown with one invoice and one bill, which reports change, and how small business owners usually choose.
Every business has to decide when to count money. Is a sale income on the day you send the invoice, or the day the client pays? Is a supplier’s bill an expense when it arrives, or when you pay it? The answer is your accounting method, and the two common choices are cash and accrual.
Neither is right for everyone. This guide explains the difference with a simple example, shows which reports change, and covers the questions to ask before you choose.
The short version
- Cash method: record income when you receive the money and expenses when you pay them.
- Accrual method: record income when you earn it and expenses when you incur them, whenever the money actually moves.
Over a long enough time, both give the same total. They differ in timing, and timing matters for monthly reports and for which tax year income and expenses fall in.
One invoice, two methods
A graphic designer finishes a branding project in late December and sends a $4,000 invoice due in 30 days. The client pays on January 20.
Under the cash method, nothing is recorded in December. In January, when the money arrives, the designer records $4,000 of income. December’s books show no income from the project; January’s show all of it.
Under the accrual method, the designer records $4,000 of income in December, when the work was done and invoiced, along with a $4,000 receivable (money owed). In January, the payment clears the receivable. No new income is recorded, because it was already counted.
The same applies to expenses. Say the designer received a $600 bill from a printer in December and paid it in January. Cash method: a January expense. Accrual method: a December expense, with a $600 payable until it’s paid.
Put together, December’s profit from these two items is $0 on the cash method and $3,400 on the accrual method. January’s is $3,400 on the cash method and $0 on accrual. Across the two months, both show $3,400.
Which reports change
Profit and loss. This is where the difference shows. Cash-basis reports track your bank account closely; accrual-basis reports track your work. A consultant who invoiced a lot in March but was paid in April looks slow in March on a cash basis and busy on an accrual basis.
Balance sheet. Accrual books show accounts receivable (what customers owe you) and accounts payable (what you owe suppliers) as assets and liabilities. Cash books generally don’t have them, because nothing is recorded until money moves.
Cash itself. Your bank balance is the same under either method. The method changes how you report activity, not how much money you have.
The case for the cash method
- Simple. Your books follow your bank statement. If money came in, it’s income; if it went out, it’s an expense.
- Matches your bank balance. Profit on paper and money in the account move together.
- Common for small businesses. Many sole proprietors and freelancers without inventory use it.
- Income follows payment. Income is counted when the money arrives, so an unpaid invoice isn’t yet income on your books.
The downside: monthly reports can mislead. A big payment that arrives in one month for work done over three makes that month look great and the others look poor.
The case for the accrual method
- Shows real performance. Income lines up with the work, and expenses with the income they helped earn.
- Shows who owes what. Receivables and payables are part of the books, so you can see how much is outstanding.
- Expected by lenders and investors. A bank looking at a loan application often wants accrual statements.
- Scales with the business. As a business grows, holds inventory or takes on long contracts, accrual reports become more useful.
The downside: more work and less connection to the bank balance. You can show a healthy profit while running low on cash, because customers haven’t paid yet.
A middle ground for your own reports
Some owners keep their tax books on one method and look at the other for management. A cash-basis freelancer can still keep a list of unpaid invoices and review it monthly, which gives much of accrual’s insight without changing method. Many bookkeeping programs can run the same reports on either basis.
Choosing, and changing
Your accounting method is a tax decision as well as a bookkeeping one. On Schedule C, line F asks which method you use: cash, accrual or other. The IRS instructions for Schedule C for the 2025 form explain the question and its options, including when a business may be required to use a particular method.
A few points to raise with a tax professional before you pick:
- Whether you hold inventory, which can affect the methods available to you.
- How large the business is, since larger businesses face more rules.
- Whether you run more than one business, each of which may use its own method.
- Timing. Your method is generally set by your first return for the business, and switching later has its own IRS procedures, so ask before you change.
Because switching later is more involved, it’s worth choosing deliberately at the start rather than drifting into one.
A quick decision guide
If you’re a solo service business, are paid within a few weeks, and want books that match your bank account, the cash method is often the natural fit.
If you invoice large amounts with long payment terms, carry inventory, have significant bills you pay later, or need statements for a lender, the accrual method usually gives a truer picture.
Whichever you choose, apply it consistently, so this month’s report can be compared with last month’s.
How Kemback fits
On the personal side, Kemback records money as it moves through your accounts, with reports that follow your real transactions. Small Business, part of Kemback Business, adds double-entry books with profit and loss, balance sheet and cash flow statements, invoices tracked until they are paid, bills from vendors, and A/R and A/P ageing, so you can see what clients owe you and what you owe others. If you own rental homes, Rental Houses keeps each home’s books (rental property tracking). See pricing.
This post is general information, not tax advice. Tax rules change over time; check with a qualified tax professional before choosing or changing an accounting method.
This article is general information, not financial, tax or legal advice. For decisions about your situation, talk to a qualified professional.
Keep reading
Double-Entry Bookkeeping Explained With Everyday Examples
Debits, credits and why every entry balances, explained with worked examples: a sale, an unpaid bill, a card purchase and an owner draw.
How to Set Up a Chart of Accounts for a Small Business
A plain guide to a small business chart of accounts: the account types, a numbering scheme, keeping the list short, and mapping it to Schedule C lines.
How to Separate Business and Personal Money
Why and how to keep business and personal money apart: separate accounts and cards, a free EIN, paying yourself, and fixing a charge on the wrong card.