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Which Is Better: Cash- or Accrual-Based Business Accounting?
Which method provides the best way to determine your business's financial health?
Written by: Sean Peek, Senior AnalystUpdated Feb 17, 2026
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Table of Contents
Understanding the primary distinction between cash- and accrual-basis accounting is essential for maintaining accurate financial records. The core difference lies in timing — specifically, when your business records sales revenue and expenses. However, each accounting method has pros and cons, and one may be better for your business than the other. For instance, while many startups begin with the simpler cash-basis method, they often transition to accrual accounting to gain deeper financial insight as they scale.
As a business owner, how do you know which small business accounting method is right for your company and when to make the switch? Keep reading for answers to these questions.
Cash vs. accrual accounting
The table below outlines the key differences between these two accounting methods.
Feature
Cash accounting
Accrual accounting
Timing of recognition
Records transactions when cash is received or paid out
Records transactions when they occur, regardless of when cash changes hands
Complexity
Simpler to understand and implement
More complex and requires detailed recordkeeping
Financial picture
Provides a snapshot of cash flow
Offers a more comprehensive view of financial performance
Suitability
Often best for small businesses with simple transactions
Often used by businesses of all sizes, especially those with complex transactions and inventory
Tax implications
Can affect tax liability based on the timing of income and expenses
Requires careful tracking of revenue and expenses to ensure accurate tax reporting
Lender preference
Less preferred by lenders
Often preferred by lenders for financial analysis
What is cash-basis accounting?
Cash-basis accounting is a straightforward accounting method that tracks a company’s financial activity based on actual cash inflows and outflows. In other words, the business records revenue when cash is received and expenses when payments are made. Unlike accrual accounting, it does not include accounts receivable (AR) or accounts payable (AP), which are typically tracked separately.
Cash-basis accounting is the simpler of the two financial accounting methods. Because it’s easy to maintain and requires minimal bookkeeping, it’s often the go-to choice for solopreneurs and early-stage small businesses.
Pros and cons of cash-basis accounting
If you’re considering cash-basis accounting for your business, it’s important to understand both the benefits and the limitations.
Pros
Cash-basis accounting is easy: It’s a low-maintenance approach with fewer accounts to track, which can make day-to-day bookkeeping more manageable for business owners who handle their own finances.
Cash-basis accounting shows the “here and now”: Because it focuses only on actual cash moving in and out, it’s easier to see how much money you currently have on hand. You don’t need to factor in future expenses or income.
Cash-basis accounting may offer tax advantages: You have more control over the timing of transactions, which can allow you to accelerate expenses or defer revenue to help manage your tax burden in a given year.
Cons
Cash-basis accounting offers a limited financial view: While it shows your current cash position, this method doesn’t account for unpaid bills or uncollected income, which can lead to misleading conclusions about long-term profitability.
Cash-basis accounting has restrictions: Not every business can use the cash method. Companies that carry inventory, extend significant credit to customers or exceed certain IRS gross receipts thresholds may be required to use accrual accounting.
Switching to accrual accounting can be complex: Transitioning from cash to accrual requires adjustments to properly recognize income and expenses. In many cases, businesses must also file a method change with the IRS.
Tip
Startups often begin with cash-basis accounting because it helps them monitor whether they're generating positive cash flow.
What is accrual-basis accounting?
Accrual-basis accounting records revenue and expenses when they’re earned or incurred, regardless of when money changes hands. Instead of focusing only on cash on hand, it provides a more complete view of a company’s financial performance and is a more advanced way to manage business accounting.
For example, you’d record revenue when you close a sale, not when your customer pays the invoice. Similarly, expenses are recorded when you receive goods or services, rather than waiting until the payment clears.
Accrual-basis accounting provides a clearer, more dynamic picture of what’s happening in your business financially.
Did You Know?
The accounting cycle in accrual-basis accounting typically includes adjusting journal entries at year-end to record expenses that have been incurred but not yet paid, such as rent or interest, as well as revenue earned but not yet received.
Pros and cons of accrual-basis accounting
Accrual-basis accounting also has advantages and drawbacks.
Pros
Accrual-basis accounting provides consistency: Because revenue and expenses are recorded when they’re earned or incurred, financial planning can be more predictable. Looking only at cash on hand at any given moment doesn’t always reflect your company’s overall activity or expected inflows and outflows.
Accrual-basis accounting can support financing opportunities: When you apply for business loans, banks and other lenders often prefer accrual accounting because it provides a clearer picture of financial health.
Accrual-basis accounting supports deeper analysis: Because revenue is recorded alongside the expenses tied to it, you get a clearer view of profit margins and operational efficiency over time.
Cons
Accrual-basis accounting can be challenging: The complexity of this method can increase the risk of errors and requires consistent oversight to avoid reporting issues.
Accrual-basis accounting may require additional support: Because accrual accounting is more complex and often involves regular reporting, businesses may need outside accounting support or an accounting and finance team to help keep everything running smoothly.
Accrual-basis accounting may create tax timing challenges: You may owe taxes on revenue you’ve recorded but haven’t yet collected, which can create cash flow pressure if customers pay slowly.
Is cash- or accrual-basis accounting best for my business?
Choosing the right method requires evaluating your business model, scale and long-term objectives. Start by asking yourself the following questions:
1. Is my company required to use the accrual method for tax purposes?
These types of businesses may be required to use the accrual method for tax compliance:
Companies that maintain inventory or sell goods
C corporations (unless they meet specific IRS exceptions)
Businesses with more than $31 million in average annual gross receipts over the prior three tax years (adjusted annually for inflation; talk to a tax consultant to confirm the latest threshold and whether it applies to your business)
2. Who needs to know my company’s financial information?
If only a few internal managers review your financial data for relatively straightforward decisions, the cash method may be appropriate. However, leaders will be limited to the information available at that moment when making decisions.
If external stakeholders need visibility into your company’s finances, such as angel investors, banks or advisors, the accrual method is often a better fit. Using accrual accounting can signal financial maturity and transparency, showing investors that your business is prepared to manage more complex operations and long-term growth.
3. Where do I want my company to be in five years?
If you’re satisfied with your current transaction volume and don’t anticipate significant growth, the cash-basis method could be the right fit. However, if you have a business growth plan to move your company beyond its current revenue level, it may make sense to consider transitioning to accrual accounting.
Accrual accounting gives you the data needed to analyze trends and forecast future performance, helping stakeholders make strategic decisions that support long-term growth.
Best accounting software for cash and accrual accounting
The best accounting software can help you maintain compliance and streamline financial management, whether you’re using cash- or accrual-based accounting. Here are a few top options to consider.
QuickBooks Online
Cash-basis: Lets users toggle reports to cash basis, providing clear visibility into available funds.
Accrual-basis: Helps manage AR and AP, track inventory and generate detailed financial reports.
Cash-basis: Simple to set up and use for tracking income and expenses.
Accrual-basis: Excels at handling more complex accrual tasks, including automated invoice reminders and multicurrency reconciliation for growing businesses.
Cash-basis: A strong option for small businesses that want a user-friendly interface to monitor cash inflows without added accounting complexity.
Accrual-basis: Includes tools like invoice management, expense tracking and inventory management, making it a good fit for businesses with more complex financial needs.
Making the shift from cash to accrual accounting is a significant milestone, but it can be challenging without the right expertise. In these situations, it may be worth hiring a certified public accountant or working with an outsourced accounting team. They can help manage the transition and provide ongoing accounting support and financial insight to help you run your business more effectively, analyze operations and make informed decisions.
Sean Peek co-founded and self-funded a small business that's grown to include more than a dozen dedicated team members. Over the years, he's become adept at navigating the intricacies of bootstrapping a new business, overseeing day-to-day operations, utilizing process automation to increase efficiencies and cut costs, and leading a small workforce. This journey has afforded him a profound understanding of the B2B landscape and the critical challenges business owners face as they start and grow their enterprises today.
At business.com, Peek covers technology solutions like document management, POS systems and email marketing services, along with topics like management theories and company culture.
In addition to running his own business, Peek shares his firsthand experiences and vast knowledge to support fellow entrepreneurs, offering guidance on everything from business software to marketing strategies to HR management. In fact, his expertise has been featured in Entrepreneur, Inc. and Forbes and with the U.S. Chamber of Commerce.
