Cash vs. Accrual Accounting: Which Method Is Right for Your Business?

When you start a business, one of the first bookkeeping decisions you'll make is which accounting method to use. The two main options — cash basis and accrual basis — each tell a different story about your finances. WHAT IS CASH BASIS ACCOUNTING? With cash basis accounting, you record income when you actually receive the money and record expenses when you actually pay them. Simple, intuitive, and easy to manage. Most small businesses start here. Example: You invoice a client in March but they pay in April. On cash basis, that income shows up in April. WHAT IS ACCRUAL BASIS ACCOUNTING? With accrual accounting, you record income when it's earned and expenses when they're incurred — regardless of when money changes hands. This gives a more accurate picture of your business's financial health at any given moment. Example: Same invoice from March — on accrual basis, that income shows up in March, when you earned it. WHICH ONE IS RIGHT FOR YOU? For most small businesses with under $25 million in annual revenue, cash basis is simpler and perfectly legal. It's easier to track, easier to understand, and works well if you don't carry large amounts of inventory or have complex billing cycles. Accrual is better if you have significant receivables, manage inventory, or need a precise monthly profit picture for investors or lenders. Many businesses switch to accrual as they grow. One important note: the IRS requires some businesses (particularly those with inventory or over a certain revenue threshold) to use accrual accounting. Check with a tax professional to confirm which method you're required to use. At Cherokee Bookkeeping, we help clients set up and maintain whichever method makes the most sense for their situation. Reach out if you'd like a quick consultation.