What Is Accrual Accounting (and Should You Be Using It)?
If you’re running a business, you’ve probably heard the terms cash basis and accrual basis accounting thrown around. But what’s the difference — and which method is right for your business?
Here’s what you need to know to make the right call for your bookkeeping and tax strategy.
What Is Cash Basis Accounting?
Cash basis accounting is the simplest method:
Income is recorded when you receive payment.
Expenses are recorded when you pay the bill.
✅ Great for small businesses, freelancers, or sole proprietors with straightforward finances.
What Is Accrual Accounting?
Accrual accounting records income when it’s earned (even if you haven’t been paid yet) and expenses when they’re incurred (even if you haven’t paid them yet).
Example:
You send an invoice today, but the client pays in 30 days.
Under accrual, you record the income today (when you earned it).
Under cash, you wouldn’t record it until the payment hits your account.
Pros of Accrual Accounting:
Gives a more accurate picture of your business’s financial health.
Matches income and related expenses to the same time period.
Often required if you carry inventory or if your business is over $27 million in revenue (per IRS rules).
Cons of Accrual Accounting:
More complex to manage (often requires accounting software or a bookkeeper).
Can show profit even if your bank account is low, since cash hasn’t been collected yet.
Who Should Use Accrual Accounting?
Businesses that carry inventory.
Companies that offer credit terms to customers (like Net 30, Net 60).
Businesses that want better forecasting and financial insight.
Wrapping It Up
Cash basis may be simpler, but accrual gives you a clearer view of your business performance — especially as your business grows.
Not sure which method is right for your business? Wrap Up Bookkeeping can help you choose the best approach and keep your books clean and accurate. Let’s chat today!
