Cash vs. accrual accounting: What’s best for your small business?

Choosing the right accounting method is an important step for any new business, yet it's often overshadowed by the excitement of launching a product or finding customers. But don't underestimate its importance. This foundational decision impacts your financial health, tax obligations, and even your ability to secure funding. 

And with over half of people polled for the QuickBooks Entrepreneurship in 2025 report looking to start a new business this year, this decision has never been more important.

In this guide, we'll demystify the two primary accounting methods—cash and accrual—exploring their benefits and drawbacks so you can confidently choose the best fit for your business. 

Jump to:

• What is cash basis accounting?
• What is the accrual method of accounting?
• Accrual vs. cash basis: Which is better?
• What is hybrid accounting?
• How to choose the right option for your business
• Streamline your accounting and save time
• Frequently asked questions

What is cash basis accounting?

Let’s begin with cash basis accounting. With this method, you record income as it’s received and expenses as they’re paid. Cash basis accounting only records your expenses when money leaves your account to pay suppliers, vendors, and other third parties. 

For instance, if you incurred a utility bill in June but didn't pay it until July, you would record the expense in July when the payment is made.

It’s important to note that this method does not take into account any accounts receivable or accounts payable. This is because it only applies to payments from clients—in the form of cash, checks, credit card receipts, or gross receipts—when payment is received.

Who uses cash basis accounting? 

Because of its simplicity, many small businesses and sole proprietors use the cash basis method as their primary method of accounting. If your business makes less than $25 million in annual sales and does not sell merchandise directly to consumers, the cash basis method might be the best choice for you. 

Some of the benefits include:

• Shorter learning curve
• Fewer items to record
• Easier tracking of expenses and revenue

Example of cash basis accounting 

If you invoice a client for $1,000 on March 1 and receive payment on April 15, you would record the income as received for the month of April since that’s when you actually had the money in hand. 

So the breakdown looks like this:

• The invoice is sent for $1,000 in March
• You do nothing in March 
• You receive payment in April
• You record the income in April

What is the accrual method of accounting?

With the accrual accounting method, income and expenses are recorded when they’re billed and earned, regardless of when the money is actually received. Accounting standards outlined by the generally accepted accounting principles (GAAP) stipulate the use of accrual accounting for financial reporting, as it provides a clearer picture of a company’s overall finances.

Who uses accrual accounting? 

While it’s perfectly acceptable for small businesses to use accrual accounting as their primary method of accounting, it’s not required. However, according to GAAP regulations, any business that is either publicly traded or produces over $25 million in sales revenue over a three-year period is required to use the accrual method. 

Example of accrual accounting 

Using the example from above, if a small business bills a client $1,000 on March 1, you would record that $1,000 as income in March’s bookkeeping—even if the funds didn’t clear your account until April 15.

• The invoice is sent for $1,000 in March
• You record revenue in March

The same holds true for accrued expenses. In this case, if your small stationery business buys paper supplies on a credit card in June but doesn’t actually pay that bill until July, you would still record that as a June expense. Let’s break this down:

• You bought paper supplies in June
• You record the expense in June

With accrual accounting, you gain a clearer understanding of your long-term profitability, giving you the confidence to make informed business decisions.

Accrual vs. cash basis: Which is better?

Accrual accounting is the winner if you’re looking solely at popularity, as it’s the most widely used, as well as the most accurate when it comes to portraying a holistic view of a company's financial health. Cash basis accounting is still a popular option, however, due to the simplicity of the overall process. 

Advantages and disadvantages of accrual accounting

Unlike cash basis accounting, which provides a clear short-term vision of a company’s financial situation, accrual basis accounting gives you a more long-term view of how your company is faring.

This is because accrual accounting gives an accurate picture of how much money you earned and spent within a specified time period, providing a clearer gauge of when business speeds up and slows down over the course of a business quarter or a full year. Additionally, it conforms to nationally accepted accounting standards. This means that if your business were to grow, your method of accounting would not need to change.

Advantages and disadvantages of cash basis accounting

The cash method of accounting certainly has its benefits, including ease of use and improved cash flow. While the cash basis method of accounting is definitely the simpler option of the two most common accounting methods, it has its drawbacks as well.

What is hybrid accounting?

Hybrid accounting is a blend of cash and accrual accounting methods. It allows businesses to record certain transactions on a cash basis and others on an accrual basis. This approach can be particularly useful for businesses that want to simplify their bookkeeping while still maintaining a relatively accurate picture of their financial position.

Here's how it might work in practice:

• Cash basis for daily operations: A small business might use cash basis accounting for day-to-day transactions like paying utility bills, receiving cash payments from customers, or purchasing office supplies. This simplifies the tracking of immediate cash flow.
• Accrual basis for long-term activities: The same business might use accrual accounting to track larger, less frequent transactions like depreciation on equipment, recognizing revenue from a long-term service contract, or recording sales made on credit. This provides a clearer long-term financial picture for these activities.

However, hybrid accounting has its limitations:

• Complexity: Determining which method to use for each transaction can be complicated, especially as a business grows.
• Potential for inconsistency: Without clear guidelines and diligent record-keeping, inconsistencies can arise, potentially leading to errors and difficulties during tax season or audits.
• Requires expertise: Effectively implementing hybrid accounting may require a deeper understanding of both accounting methods and a higher level of accounting expertise.

Ultimately, careful consideration is needed to determine if the flexibility of hybrid accounting outweighs the potential complexities for your specific business needs. Consulting with an accounting professional can provide valuable guidance in making this decision.

How to choose the right option for your business

For businesses that primarily conduct transactions in cash and maintain minimal product inventories, the cash accounting method can offer a convenient and reliable approach to tracking revenue and expenses, simplifying bookkeeping requirements.

However, for the most accurate and updated accounting view of your financial health, accrual accounting might be the better choice. There are also some other factors to keep in mind.

How complex is your business?

Depending on your industry and the complexity of your books, one accounting method may be more sustainable than the other. For example, a business with multiple accounts, hundreds of employees, and various LLCs will probably want to stay away from cash basis accounting because it won’t give the company the big-picture view it’s looking for when it comes to financials on the income statement, balance sheet or cash flow statement. 

How much revenue do you generate?

Another reason to choose one over the other would be based on your sales revenue. According to GAAP, if you exceed $25 million in annual revenue, then you are required to use the accrual method. For many small businesses, this isn’t an issue at the moment but maybe in the future, so it’s something to keep in mind. 

Are you planning to go public?

Having a publicly-traded company or one that may go public is another stipulation of the GAAP guidelines. Publicly traded companies have a duty to report an accurate view of their financial well-being to shareholders. The best method for this is the accrual system of accounting. 

Streamline your accounting and save time

Choosing between cash and accrual accounting can feel overwhelming, but implementing the right tools can simplify your financial management, regardless of the method you choose. While accrual accounting offers a more comprehensive view of your financial health, both methods require diligent tracking of income and expenses.

Whether you opt for cash or accrual accounting, the right software can empower you to manage your finances efficiently and focus on growing your business. Features like automated invoicing, expense tracking, and financial reporting can simplify your workload and minimize the risk of errors. Invest in accounting software to streamline your bookkeeping processes and save valuable time.