Cash basis records income when money hits your account and expenses when you pay them. Accrual records income when you earn it and expenses when you incur them, regardless of when cash moves. Both are legitimate methods. The right choice depends on how your business operates and who needs to read your financials.

Most small service businesses use cash basis. It’s simpler, easier to understand, and lines up with how owners already think about money. You also get a tax advantage in many cases because you don’t pay tax on income until you’ve actually been paid. If a customer owes you $20,000 at year-end, that revenue doesn’t hit your tax return until they pay.

Accrual basis tells a more accurate story about profitability. If you bill $50,000 in December but don’t collect until February, cash basis makes December look terrible and February look great. Accrual shows you earned that revenue in December when the work was done. For decision-making, accrual numbers tend to be more useful because they match revenue to the costs that generated it.

A few situations push you toward accrual. If you carry meaningful inventory, you need accrual-style tracking to value what’s on the shelf and calculate cost of goods sold correctly. If you have significant accounts receivable or accounts payable, ignoring them on cash books hides real obligations and real money owed to you. If a bank, investor, or franchisor wants financial statements, they almost always expect accrual.

A common practical setup is keeping books with accrual-style detail (tracking AR, AP, and inventory) while filing taxes on cash basis. This gives you useful internal reports plus the tax simplicity of cash. Your bookkeeper can structure the records so both versions are available without duplicating work.

There are also IRS rules to consider. C corporations and certain partnerships above revenue thresholds are required to use accrual. Businesses under those thresholds can generally choose. Once you pick a method on your tax return, switching requires IRS approval, so the decision isn’t casual.

If you’re not sure which fits your situation, it’s worth a conversation before you commit. Our bookkeeping, tax and consulting services include helping owners think through this based on how their business actually runs, what their lenders expect, and what reporting they need to make good decisions throughout the year.