Cash or Accrual? What's the Difference?
If you own a business, one of the first and most important decisions you’ll have to make is which method of accounting your business will use for reporting income and expenses.
The two methods are: cash basis and accrual basis.
Cash basis is arguably the easier and simpler option for small business owners to use. This method recognizes income when you receive a payment from a customer, and a deduction is taken when you pay cash or write a check.
Accrual basis recognizes income when the services are rendered or an invoice is sent, despite the fact that you may not get paid at that time, which is where the term “accounts receivable” comes into play. Expenses are handled the same way. If you buy something today but don't pay for it until later, you would deduct the cost now. What you owe for purchases constitutes your "accounts payable."
The cash method more closely reflects how money is coming in and out of the business. However, it doesn't tell you how much people owe you or how much debt the business owes. The accrual method better reflects how the business is actually doing, but doesn’t reflect how much cash is actually on hand.
Take time to chat with your accountant about the pros and cons of each method, and decide what makes sense for your business.
