The two primary accounting methods determine when transactions are recorded:
Cash basis: Record revenue when cash is received. Record expenses when cash is paid. Simple and intuitive — the books reflect actual cash movement.
Accrual basis: Record revenue when earned (when the service is delivered or goods are provided), regardless of when payment arrives. Record expenses when incurred (when the obligation is created), regardless of when payment is made.
The difference in practice
A catering company delivers a $3,000 event on March 15 and sends an invoice due April 15:
| Cash basis | Accrual basis | |
|---|---|---|
| March revenue | $0 | $3,000 |
| April revenue | $3,000 | $0 |
Under cash basis, March looks like a bad month and April looks great. Under accrual, March reflects the actual economic activity — the work was done and the revenue was earned in March, even though cash arrived in April.
Which to use
Cash basis is simpler and works well for very small businesses, sole proprietors, and businesses where payment and service happen simultaneously (retail, restaurants with no catering). The IRS allows cash basis for businesses with less than $30 million in average annual gross receipts.
Accrual basis provides a more accurate picture of economic reality — especially for businesses with significant accounts receivable or accounts payable. It’s required by GAAP (Generally Accepted Accounting Principles) and by the IRS for larger businesses.
Many small businesses use cash basis for tax purposes (simpler) but run internal reports on an accrual basis (more accurate for decision-making). Most accounting software supports both. Discuss with your accountant during initial bookkeeping setup. See Small Business Bookkeeping and Small Business Tax Strategy.