Cash vs Accrual Accounting: Differences, Pros and Cons
Short answer. Cash-basis accounting records revenue when money is received and expenses when money is paid. Accrual accounting records revenue when it is earned and expenses when they are incurred, whatever the cash timing. Accrual gives a truer picture of performance and is required for larger and public companies; cash basis is simpler.
Side by side
| Cash-basis accounting | Accrual accounting | |
|---|---|---|
| Revenue recognised | When cash is received | When earned (service done, goods delivered) |
| Expenses recognised | When cash is paid | When incurred, matched to the revenue they helped earn |
| Receivables and payables | Not recorded | Recorded as accounts receivable and accounts payable |
| Complexity | Simple, like a checkbook | More complex, needs adjusting entries |
| Accuracy of profit | Can swing with payment timing | Smoother, matches revenue to related costs |
| Required for | Not allowed for public companies | Public companies under GAAP or IFRS; larger firms for tax |
| Typical users | Small businesses, freelancers, individuals | Companies with inventory, credit sales or outside investors |
Which one fits you?
Lean towards Cash-basis accounting if…
- you run a small business with simple, immediate payments
- you want straightforward bookkeeping and tax timing
Lean towards Accrual accounting if…
- you sell on credit or hold inventory
- you need statements for lenders or investors
Frequently asked questions
Which method do most companies use?
Accrual. Public companies must, and most lenders and investors expect it.
Can I switch methods?
Yes, but tax rules usually require filing a change in accounting method; check with an accountant.
Why can profit differ between the two?
A sale made in December but paid in January is revenue in December under accrual and January under cash.
General education, not personal financial advice. Figures are typical US examples and vary by provider and year.