How to Choose Between Cash and Accrual Accounting Methods
- Brian R. Schobel, CPA
- Oct 1
- 2 min read
When you’re running a small business, choosing how to track your money is a big decision. One of the first choices you’ll face is whether to use cash or accrual accounting. Don’t let the terms scare you—this decision can affect everything from your taxes to how you understand your business’s health.
Here’s a breakdown to help you choose the method that fits your business best.
What Is Cash Accounting?
Cash accounting records income when money is received and expenses when money is paid.
Best for:
Sole proprietors or freelancers
Small service-based businesses
Businesses with no inventory
Pros:
Simple and easy to manage
Gives a clear picture of cash flow
Ideal for businesses just starting out
Cons:
Doesn’t show money owed to you or what you owe
Can make your finances look better (or worse) than they are
What Is Accrual Accounting?
Accrual accounting records income when it's earned and expenses when they’re incurred, even if cash hasn’t changed hands yet.
Best for:
Businesses with inventory
Growing businesses looking for investors or loans
Businesses with complex transactions
Pros:
Gives a more accurate financial picture
Required by law for certain businesses (especially those with over $25M in revenue)
Helps with long-term planning
Cons:
More complex to manage
You may owe taxes before getting paid
Tip: Some small businesses start with cash accounting, then switch to accrual as they grow.
Final Thought: Think Ahead
Choosing your accounting method isn’t just about ease—it’s about how you want to grow your business. Cash accounting may work now, but if you’re planning to expand, accrual might save you time and confusion down the road.
Next step: Talk to an accountant if you’re unsure. A quick conversation could save you hours (and dollars) later.
In business, clarity is power—start by understanding your numbers.
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