When you’re running a business—whether it’s your first side hustle or a growing company with a team—understanding your finances is key. One of the most foundational decisions you’ll make is how to track your income and expenses. This comes down to two methods: accrual basis accounting and cash basis accounting.

At first glance, the difference may seem like accountant-speak. But this decision shapes how you view profits, taxes, and even cash flow. Let’s break it down in a way that makes sense for new business owners, while still digging into the deeper considerations experienced entrepreneurs need to think about.

 

What Is Cash Basis Accounting?

Cash basis is the simpler of the two accounting methods. You record income when you receive the money. You record expenses when you pay the bills.

Example: You send an invoice to a customer on March 10, but they don’t pay until April 2. Under the cash method, you record that income in April—not March.

Pros:

• Easy to understand
• Clear picture of your bank balance
• Works well for small businesses and solopreneurs

Cons:

• Doesn’t show what you owe or what you are owed
• Can distort profitability, especially around year-end
• Not accepted by GAAP (Generally Accepted Accounting Principles)

This method is great when cash flow is king and your business is still small enough not to carry inventory or large receivables.

 

What Is Accrual Basis Accounting?

Accrual basis records income when it’s earned and expenses when they’re incurred—even if the cash hasn’t moved yet.

Example: You invoice a client in March. Even if they pay in April, you count that income in March. If you get a bill in June but don’t pay it until July, it still shows up in June.

Pros:

• Matches income and expenses to the time they actually happen
• Gives a more accurate picture of profitability
• Required for businesses with inventory or sales over $25M (per IRS rules)

Cons:

• More complex to manage
• Doesn’t match your bank account, which can be confusing
• Might show profit when you don’t have cash in hand

This method is ideal for growing businesses that need a complete financial picture to make informed decisions.

 

Which Method Should You Use?

New business owners often lean toward cash basis because it’s simple and aligns with what’s actually in the bank. But that simplicity can become a liability as your business grows.

Experienced business owners usually benefit from switching to accrual accounting, especially when:

• They extend credit to customers
• They carry inventory
• They want to understand true profitability by month or quarter
• They need clean financials for investors or a potential sale

Many business owners don’t realize that switching from one method to the other requires IRS approval if you’ve already filed taxes. That’s why working with a knowledgeable bookkeeper is crucial from day one.

 

Why This Choice Matters for Taxes and Financial Decisions

Your accounting method directly affects your tax liability. For example, a business using the cash basis might delay income until January to reduce taxes for the current year. A business using accrual must recognize that income in the year it was earned—even if the payment hasn’t arrived.

This choice also impacts how you plan. Accrual accounting gives a more complete financial story. You can see outstanding invoices, unpaid bills, and even anticipate upcoming shortfalls. That’s critical when you’re planning budgets, applying for loans, or evaluating your growth strategy.

 

How a Bookkeeper Can Help (And Why You Shouldn’t DIY This)

Choosing an accounting method isn’t just a one-time decision—it influences everything from your tax prep to your pricing strategy. And while accounting software gives you options, it doesn’t explain the why behind those choices.

That’s where having a professional bookkeeper like The Balance Sheet makes all the difference.

Here’s how we help:

• We choose the right method based on your business goals, structure, and compliance needs
• We keep your books clean and ready for tax season—no last-minute scrambling
• We alert you to red flags like late-paying customers, cash shortages, or unexpected expenses
• We set up systems so you can focus on running your business, not reconciling spreadsheets

Whether you’re a brand-new LLC or a multi-location business prepping for growth, our team makes sure your financial records are accurate, clear, and aligned with your goals.

 

What Most Business Owners Get Wrong (And How to Avoid It)

Too often, business owners:

• Pick the method that seems easiest without thinking long-term
• Use a mix of both and create a messy, inaccurate financial trail
• Wait too long to get help, then struggle at tax time

The truth? Clean books save you money. Not just at tax time, but every time you make a business decision. You can’t grow what you don’t understand—and a professional bookkeeping system gives you clarity.

 

Ready to Take Control of Your Business Finances?

Your accounting method is more than a checkbox—it’s the foundation of your financial success. At The Balance Sheet, we help business owners of all sizes understand their numbers, keep their books clean, and make smart financial decisions every step of the way.

Schedule a free consultation today and let’s talk about which accounting method is right for you—and how we can support your growth from day one.