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

Choosing between cash and accrual accounting isn’t a “technical” decision — it directly affects your taxes, cash flow, financial reports, and how clearly you understand your business.

Most business owners pick the wrong method because no one explains it in plain English. Let’s fix that.

What Is Cash Accounting?

Cash accounting records income when money is received and expenses when money is paid.

Example:

You send an invoice in March Client pays you in April Income is recorded in April

Pros of Cash Accounting

• Simple and easy to manage
• Clear picture of cash in your bank
• Great for very small businesses
• Often results in lower taxes short-term

Cons of Cash Accounting

• Doesn’t show true profitability
• Can hide upcoming expenses
• Poor visibility for growth planning
• Not ideal for inventory-based businesses

Bottom line: Cash accounting shows what you have — not what you’ve earned.

What Is Accrual Accounting?

Accrual accounting records income when it’s earned and expenses when they’re incurred, regardless of when cash moves.

Example:

You send an invoice in March Client pays in April Income is recorded in March

Pros of Accrual Accounting

• Accurate picture of profitability
• Better for forecasting and scaling
• Required for many growing businesses
• Preferred by investors and lenders

Cons of Accrual Accounting

• More complex
• Requires consistent bookkeeping
• Cash flow can be less obvious without reports

Bottom line: Accrual accounting shows how your business is actually performing.

Which Accounting Method Does the IRS Allow?

The IRS allows both, but with rules.

You generally must use accrual accounting if:

You carry inventory You’re a C-Corporation (with exceptions) Your average annual gross receipts exceed IRS thresholds

Many small service-based businesses can choose either method — but choosing wrong can cost you in taxes or decision-making.

Which Accounting Method Is Right for Your Business?

Cash Accounting Is Best If:

You’re a solo entrepreneur You provide services (no inventory) You want simple books You’re focused on cash management You’re early-stage or part-time

Accrual Accounting Is Best If:

You’re growing or scaling You sell products or manage inventory You invoice clients regularly You want accurate profit tracking You plan to seek funding or loans

Here’s the brutal truth:

Many businesses outgrow cash accounting and don’t realize it — until their numbers stop making sense.

Can You Switch from Cash to Accrual Accounting?

Yes — but it must be done correctly.

Switching methods involves:

IRS Form 3115 (in many cases) Adjusting prior balances Reclassifying income and expenses Updating your bookkeeping system

Doing this wrong creates IRS risk and messy financials. This is where professionals earn their fee.

Why This Decision Impacts Your Taxes

Cash accounting allows more flexibility in when income and expenses hit your tax return.

Accrual accounting focuses on accuracy, not timing.

Choosing the wrong method can lead to:

Paying more tax than necessary Misreading profitability Poor pricing decisions Cash flow surprises

Final Verdict

There is no “best” accounting method — only the right one for your business stage.

If your books feel confusing, inconsistent, or disconnected from reality, chances are:

You’re using the wrong method, or It’s set up incorrectly

Both problems are fixable.

📊 Not sure which accounting method you should be using?

👉 Book a free consultation with BnB Consulting.

We’ll review:

your current bookkeeping setup your business goals your tax exposure

• Your current bookkeeping setup
• Your business goals
• Your tax exposure

…and help you choose (or switch to) the method that actually supports your growth.