Accounting & Finance

Accrual vs. cash basis accounting: It all comes down to timing

  • 5 min Read
  • August 2, 2023

Author

Grace Townsley

As a professional copywriter in the finance and B2B space, Grace Townsley offers small business leaders big insights—one precisely chosen word at a time. Let's connect!

Table of Contents

Your products and services may drive revenue through your company. But at the end of the day, it’s accounting that keeps you in business. Well-structured and timely accounting helps every member of your team know where each dollar is going and plan accordingly. Disorganized or inconsistent accounting, on the other hand, can impact your ability to make data-driven decisions, and put your business in jeopardy. That’s why it’s essential to know the difference between the two most commonly used accounting methods — and which one is right for your business.

Schedule a call today

What is the difference between cash and accrual accounting?


While there are several significant differences between accrual and cash accounting, the biggest one essentially boils down to timing. Specifically, when your revenue and expenses are recognized and recorded. 

Let’s take a closer look at each type of accounting, and how it’s used to record your financial transactions:

How does cash basis accounting work?


Cash basis accounting records your revenue the moment the payment is received. It also records your expenses as soon as they’re actually paid. Businesses that use the cash basis method of accounting don’t record any incoming or outgoing cash until the change is reflected in their bank account. 

Here’s an example of how cash basis accounting works for a typical small business:

Say your business bills a customer in January for a $1,000 order they placed that month. Your bill terms are net 30, meaning they have a full 30 days to pay for their order. You’ve sent the shipment, they’ve received your products, and now you’re just waiting for payment. Finally, in February, your customer pays their invoice. That’s when you record the revenue. Not in January, when the order was placed, but in February, when the payment hits your account. 

Talk to us about how Escalon’s experienced, essential business services can help you optimize your accounting systems and processes.


Because cash basis accounting is a reactive form of accounting, it’s the simpler method of the two. That makes this accounting method ideal for small businesses and sole proprietors who operate with a lean team. 

How does accrual accounting work?


Accrual accounting is a more complex accounting method that records revenue when it’s earned and expenses when they’re incurred, regardless of when the credit or debit is reflected in your account. This accounting method is based on the matching principle, which aims to match revenue to expenses within the same accounting period, using a series of transaction logs called journal entries. 

Here’s how accrual accounting would work for the same business used in our earlier example:

Your business bills a customer in January for a $1,000 order they placed that month. Your bill terms are net 30, so while they received the bill in January, it won’t be due until February. However, because you use accrual accounting, you record that $1,000 of revenue in your income statement for January. You also mark that $1,000 in your January “accounts receivable” report as money currently owed to you. Once your customer pays their bill, instead of recording that payment as revenue, it’s simply deducted from your accounts receivable to balance out your books. 

As you can see from this example, accrual accounting is more complicated than cash basis accounting because of the extra steps involved in recognizing revenue and expenses when they occur. But this real-time financial tracking method provides the most accurate picture of your company’s current health, since it includes every dollar currently owed to your company and by your company at any given moment. 

Cash basis vs. accrual basis accounting: Which is better?


Each accounting method has its advantages and drawbacks. Cash basis accounting is simple, easy to manage, and quick to pick up. But it can also give an inaccurate picture of your business’s overall financial health. Especially if there are often significant delays between when you take orders and receive payment, or incur expenses and pay back those expenses. 

For that reason, cash basis accounting is not the ideal option for: 

High revenue businesses.

If you handle thousands of transactions, cash basis accounting can oversimplify your records, obscuring your actual cash on hand and incoming revenue.

Businesses offering credit.

Companies that invoice customers for products or services after the order is placed may not benefit from cash basis accounting, because it doesn’t recognize revenue until payment is received. For example, if your business frequently offers net 30 invoicing terms, your true revenue and financial performance can be delayed by up to a month every time a customer places an order. 

Companies seeking funding.

Venture capital firms and investment partners may prefer to see financial statements built on accrual accounting, because these statements offer a more accurate view of your financial position. 

In these cases, or if your company is preparing for significant growth, accrual accounting can be the smartest option for your business’s accounting standards. While accrual accounting may require a bit more expertise and reporting, its clear statements, transparent revenue and expenses tracking, and scalability can make it the best option for expanding businesses.

Want more? Escalon has helped over 5,000 small businesses across a range of industries to optimize routine business functions, like taxes, accounting, insurance, payroll and HR. Talk to an expert today.

Schedule a call today

This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Accounting & Finance

The Importance of Financial Literacy for Business Owners 

Running a business isn’t just about having a great product or service – it also requires a firm grasp of...

Accounting & Finance

Tax Implications of Remote Work: What SMBs Need to Know 

The rise of remote work has opened exciting possibilities for small and medium businesses – access to a wider talent...

Leadership & Growth

Succession Planning: Preparing for Leadership Transitions 

Change is inevitable in business, and one of the most significant changes a company can face is a leadership transition....

Accounting & Finance

Sales Tax Compliance in the Digital Age: Challenges and Solutions 

The rise of e-commerce and digital business models has revolutionized how companies reach customers, but it has also added new...

Leadership & Growth

Implementing Lean Management Principles in SMBs

“Lean management” might conjure images of big manufacturing plants fine-tuning assembly lines, but the principles of lean are highly relevant...

People Management & HR

Developing a Competitive Compensation Strategy for SMBs

For small and medium-sized businesses, a competitive compensation strategy is key to attracting and retaining the talent needed to grow...

Accounting & Finance

The Role of Financial Reporting in Small Business Growth

Financial reporting often appears to be a routine exercise, but for small businesses, it can be the difference between reactive...

Accounting & Finance

The Impact of Accurate Financial Operations on Business Success

Financial operations encompass the systems and processes that govern every monetary aspect of a business—from managing payables and receivables to...

People Management & HR

The Benefits of Outsourcing Payroll for Small Businesses 

For many small business owners, running payroll is a time-intensive chore that requires meticulous calculation, familiarity with tax codes, and...