Cash vs. accrual accounting: What are the main differences?

Published

Apr 11, 2025

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It’s the end of the month, and your books show a healthy profit. But your bank account (and your creditors) tell a different story. You’ve done the work and sent the invoices, but you’re still waiting on three big client payments. That gap is at the core of cash basis and accrual accounting: the two primary methods most businesses use to record transactions.

In this guide, we’ll dig into how each method works, when to use them, and how each one can help you manage business finances effectively.

What is accrual accounting?

Accrual accounting is a method where you record income and expenses when they happen, even if no money changes hands. If you send an invoice for $10,000, you record that $10,000 on the same day. The client might not pay for a month, but your balance sheet will show that your business has that money because it’s been earned. The same rule applies to expenses. If a bill comes in, it goes on the books when you receive it, not when you pay.

By matching income to work completed and expenses to when they’re actually incurred, accrual accounting shows whether your business is truly profitable versus just maintaining a positive cash flow. It’s especially useful for businesses that manage inventory, bill clients after delivering work, or need to deliver GAAP-compliant financial statements to banks, investors, or regulators.

Accrual basis accounting benefits and drawbacks

Accrual accounting is typically the preferred method for businesses that need a more complete understanding of their finances that goes beyond cash flow. It’s generally considered more helpful if your accounting needs to consider deferred revenue, inventory, or expenses that don’t line up precisely with payment dates. It takes more effort to maintain and can come with a learning curve, but it offers deeper insights than simpler methods.

Accrual basis accounting pros

Built to give businesses clarity, accrual accounting aims to help decision makers plan and budget based on financial performance over time.

Clearer and more precise view of financial health: By recording inflows and outflows in the period to which they belong, accrual accounting ensures that financial statements reflect the state of the business itself, not just what it has in the bank.
Better long-term planning and decision-making: Because it captures both receivables and payables, accrual accounting helps managers plan budgets, forecast revenue, and plan for potential shortfalls before they happen.
No need to transition from cash accounting: Starting with accrual accounting saves you the hassle of updating your accounting method as your business grows. It’s also a better way to give investors and lenders insight into what makes your business a safe bet.

Accrual basis accounting cons

Without the right tools and support, accrual accounting can be challenging for lean teams to implement.

Complexity: Keeping up with non-cash transactions, journal entries, and monthly reconciliations can be time-consuming and may require help from a bookkeeper or accountant to navigate the accounting cycle correctly.
Risk of internal fraud: Because accrual accounting involves recording revenue and expenses before money moves, it leaves room to manipulate timing or amounts. Without strong internal controls and an accounting checklist, these issues can fly under the radar longer than they would in a cash-based system.
Cash flow challenges: Under accrual accounting, your books can show a profit while you scramble to settle up with service providers. You’ll need proactive cash flow management to stay on solid ground.

When to use the accrual method of accounting?

Some businesses are required to use accrual accounting, especially those that need to comply with GAAP for tax purposes or report to outside investors. Even when it’s not mandatory, however, this method may be the better option for long payment cycles or more complex operations. If your business relies on credit, tracks inventory, or has larger operating expenses, here’s why accrual account makes sense:

Businesses with accounts receivable and payable: If you regularly send invoices or buy on credit, accrual accounting helps you monitor what’s been spent and what’s owed for an accurate view of your financial position.
Retailers and e-commerce stores with inventory: Once you carry inventory, the IRS typically requires you to transition to accrual accounting. It also helps you match your cost of goods sold to the same period as your sales, which improves accuracy.
Businesses with significant expenses to track: If your business regularly incurs big expenses, accrual accounting ensures that you take them into account as they happen and prevents an overly optimistic view of your future resources.

Accrual accounting example

BuildIt, an architecture firm, completes a $75,000 renovation plan for a client on June 10 and sends the invoice the same day. A few days later, on June 20, the firm’s digital marketing consultant sends an invoice for a publicity campaign worth $20,000. BuildIt pays the invoice on July 17, one day after it receives the $75,000 payment from the client for the renovation plan.

Under the accrual accounting method, BuildIt records the $75,000 as income and the $20,000 as an expense in June when it sends and receives the invoices. On the balance sheet, the amounts appear as ‘amounts receivable’ and ‘amounts payable’ to clarify that the money hasn’t changed hands yet. This gives BuildIt a clearer view of its financial performance for the month, allowing the firm to monitor project profitability and manage budgets more effectively.

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What is cash accounting?

Cash accounting is an accounting method where you record income and expenses only when money actually moves. If you get paid, that’s income. If you pay a bill, that’s an expense. It’s simple, intuitive, and mirrors how many people manage their personal finances—what’s in your business bank account is what you have available to spend.

On the other hand, credit sales, unpaid invoices, and accounts payable won’t appear on your balance sheet until money comes in or goes out. That means your books won’t reflect work you’ve already done or bills you still owe, making it harder to forecast cash shortages or plan for upcoming expenditures. So, while cash accounting keeps things straightforward and efficient, it has real limitations for financial planning as your business grows.

Cash basis accounting benefits and drawbacks

Cash accounting is usually the go-to accounting method for small businesses because it’s straightforward and easy to implement without complicated accounting tools. As your business grows, however, and starts dealing with credit and inventory, you might start to see some limitations.

Cash basis accounting pros

If you handle accounting yourself and need to keep close tabs on your cash flow, the cash basis method can give you the needed visibility without getting bogged down in complex calculations and reports.

Easiest accounting method to use: You don’t need advanced accounting knowledge or complex tools to implement cash accounting. As long as you stay on top of when you make and receive payments and record them properly, you’re on track.
Provides a real-time view of available cash: Since your books only reflect actual cash on hand, it’s easy to see what’s available to spend. There’s no confusion about pending invoices or unpaid bills.
Gives flexibility in managing taxable income: Because you record income when you receive payment, you may be able to coordinate the timing of revenue and expenses to reduce tax liability.

Cash basis accounting cons

While it’s a great fit for small business owners running a tight ship on limited resources, cash accounting doesn’t always provide the most accurate view of company finances.

Doesn't reflect outstanding liabilities or incoming payments: Unpaid bills or uncollected revenue? They might as well be invisible in your books, which can make things look healthier (or worse) than they really are.
Restricted to certain businesses by the IRS: If your business earns more than the ceiling for gross receipts set by the IRS or holds inventory, you may be legally obliged to use the accrual method for tax reporting.
Transitioning to accrual accounting can be complex: Making the switch to accrual accounting or another method from cash accounting can mean a detailed review of all your past transactions, changes to your accounting system, and sometimes professional help to get it right.

When to use cash basis accounting?

Because it’s the simplest accounting method to manage, small businesses generally opt for cash basis accounting when they’re just starting out. It typically requires less bookkeeping, fewer adjustments, and more closely tracks what’s actually in your bank account. The following situations also lend themselves to cash accounting:

Small businesses with simple financial transactions: If you don’t deal with accounts payable or receivable, cash accounting keeps things clean. You only record what’s paid or received on a day-to-day basis, which makes following cash flow easier.
Service-based businesses with no inventory: Consultants, freelancers, and others who don’t track inventory may also prefer this method. With no need to match inventory costs to revenue, monitoring cash in and cash out is usually sufficient.
Startups and businesses with limited resources: If your business is small and your team is lean, basic accounting software may be all your budget can accommodate. Tools like this can typically track unpaid invoices and accrue expenses automatically, but they’re not cut out for more complex financial management tasks.

Cash accounting example

Alex, a small business consultant, completes a project worth $25,000 on June 15 and sends an invoice the same day. The client doesn’t pay until July 10, however, which means Alex doesn’t pay a subcontractor’s June invoice until the next month. Even though Alex requested payment from the client and received the subcontractor’s invoice in June, both transactions are recorded in July.

Alex prefers this method because it provides a real-time view of cash flow. Only actual cash and paid expenses show up on the balance sheet—there’s no line for accounts payable or accounts receivable.

That means Alex has instant insight into how much money the business has available at any given moment. For small business owners operating on tight margins and managing budgets from month to month, this kind of clarity can prevent accidental overspending in slow periods or when payments are unpredictable.

What is the difference between cash and accrual accounting?

The core difference between cash and accrual accounting comes down to timing. Specifically, when you record income and expenses. That simple shift, however, impacts everything from your financial reporting to how you handle taxes and compliance. Below are some key distinctions between these two types of accounting methods:

Timing of income recognition: In cash accounting, you record income only after you receive payment. In accrual accounting, it’s recorded when you close the deal, even if the money arrives later.
Timing of expense recognition: Cash accounting logs expenses when you pay the bill. The accrual method records them when they’re incurred, even if you pay weeks later, making it easier to match costs and revenues.
Financial reporting: The accrual method captures your business’s full financial activity, making it easier to spot trends and compare performance over time. Cash accounting only reveals what’s happening with actual cash, and can mask big swings in revenue and expenses that haven’t hit your account yet.
Tax implications: With cash basis accounting, you might delay taxes by deferring income or speeding up expenses. Once you pass a pre-determined amount in gross receipts, however, the IRS may require the accrual method for tax compliance.
Business size and applicability: The cash basis method works well for small businesses with no inventory. For larger organizations that typically deal with accounts payable, accounts receivable, or outside investors, accrual accounting ensures they meet GAAP and other standards.

Which is better, cash or accrual accounting?

The right accounting method depends on how your business operates, how much complexity you’re prepared to handle, and what kind of reporting you need. Here are some key factors to consider:

Business complexity: If your business deals with inventory, a high volume of transactions, or accounts payable and receivable, the accrual method offers a clearer view of your finances. Cash basis accounting runs the risk of oversimplifying things and creating gaps in reporting.
Revenue from sales: If you make a lot of sales on credit, cash accounting won’t show the money you’re owed until it arrives in your bank account. Accrual accounting helps you match revenue to the correct period, making it easier to plan ahead.
Public company status: If you’re publicly traded or courting outside funding, GAAP compliance is essential—and that means using accrual-basis accounting. Investors and lenders expect a clear, consistent income statement.
Tax year planning: The accounting method you choose affects which income and expenses fall into a given tax year. That matters when you’re thinking about tax liability, deductions, and year-end strategies.

If your business is simple, small, and focused on cash in and cash out, cash accounting could be your best bet. But if you’re growing, dealing with credit, or aiming for long-term visibility, accrual accounting may be the smarter choice.

Streamline your accounting needs with Rippling

Whether you use the cash or the accrual accounting method, staying organized is easier when your accountant has access to the right tools. It also helps when payroll and expense management are built into the same system, so your accountant isn’t chasing data across spreadsheets. Rippling consolidates all of your company’s finances—from payroll and benefits to corporate cards and expense management–giving you an up-to-date view of cash flow across your company and offering unprecedented control over spending patterns.

While most expense management solutions only allow for basic employee-manager approval chains, Rippling’s expense management software uses an advanced policy engine, allowing you to set hyper-custom policies based on the vendor, dollar amount, and expense category, helping you block out-of-policy expenses with ease. You can also tee up automated workflows that help you control spend, like triggering an alert when a department’s expenses sharply increase.

With Rippling, you can:

Automatically route expenses and bills to the right approver every time.
Flag out-of-policy spending with hyper-custom policies, like by vendor or value, for further review.
Close the books faster with AI-powered transaction categorization, and integration with your accounting systems.

Cash vs accrual accounting FAQs

Which is better cash or accrual accounting?

The best accounting method for you depends on your business. Cash accounting is more straightforward and good for tracking cash flow, especially if you’re a small business with no inventory. But accrual accounting does a better job of capturing your revenue and expenses at specific times, which makes for more accurate reporting. If you’re growing, need outside funding, or want clean financial statements, accrual may be the better fit. Be aware, too, that the IRS may eventually require it once your gross receipts hit a certain threshold.

Is GAAP accrual or cash basis?

GAAP uses the accrual basis of accounting. That means you record revenue when you receive it and liabilities when you incur them, even if you won’t pay out the cash until later. It gives a clearer picture of how the business is really doing at a precise moment in time. Cash accounting is too limited for that, especially in a complex enterprise. That’s why public companies and others that follow generally accepted accounting principles use the accrual method.

Do small businesses use cash or accrual accounting?

Most small businesses start with cash accounting for simplicity and efficiency; you record income and expenses when money moves. But if gross receipts hit $25 million over three years or the business carries inventory, the IRS might require a business to switch to the accrual method. Why? Accrual accounting gives a more accurate picture of your business’s financial health by tracking revenue and expenses when they’re earned or billed.

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