Cash vs Accrual Accounting: The Difference, With Examples
The difference between cash vs accrual accounting is timing. Cash accounting records income when money arrives and expenses when money leaves. Accrual accounting records income when you earn it and expenses when you incur them, whether or not any money has moved yet. Same business, same year, different monthly picture.
Neither method changes how much money you end up with. It changes when you see it in your reports and, for tax, which year it lands in. For many small businesses, the sensible answer is to know both: one for your tax return, as your accountant advises, and one for understanding how the business is doing.
Cash vs accrual accounting at a glance
| Cash | Accrual | |
|---|---|---|
| Income recorded | When you receive it | When you earn it |
| Expenses recorded | When you pay them | When you incur them |
| Shows who owes you | No | Yes, as receivables |
| Shows what you owe | No | Yes, as payables |
| Effort | Lower | Higher |
| Best for | Seeing cash in and out | Seeing real performance |
The IRS describes it in similar terms. Under the cash method, you report income in the tax year you receive it. Under the accrual method, income is reported in the year it is earned, regardless of when payment is received.
A worked example
A business finishes $10,000 of work in December and invoices it. The client pays in January. In the same December, the business takes a $3,000 supplier bill, and pays it in January too. Rent of $1,000 is paid in December.
| December | Cash | Accrual |
|---|---|---|
| Income | $0 | $10,000 |
| Supplier cost | $0 | $3,000 |
| Rent | $1,000 | $1,000 |
| Profit for December | −$1,000 | $6,000 |
| January | Cash | Accrual |
|---|---|---|
| Income | $10,000 | $0 |
| Supplier cost | $3,000 | $0 |
| Profit for January | $7,000 | $0 |
Add the two months up and both methods reach $6,000. The total is the same. The shape is not.
Under cash, December looks like a loss and January a great month. Under accrual, December shows the work was done and profitable, which is what actually happened. If that December falls at your tax year end, that year shows a $1,000 loss under cash and a $6,000 profit under accrual, a $7,000 difference that cash picks up in the next tax year.
What cash accounting is good at
It is simple. If you can read a bank statement, you can follow it.
It matches your bank account. Your reported income is money you really have.
It can help with tax timing. You generally pay tax on money you have received, not on invoices still unpaid. A client who pays in January moves that income into next year. Talk to your accountant before relying on this, because the rules prevent some obvious tricks.
Its weakness is that it hides what is coming. A cash report cannot show the $40,000 your clients owe or the $25,000 you owe suppliers. A strong month may just be a month when lots of clients paid. A busy month of work with few receipts can look like failure.
What accrual accounting is good at
It shows real performance. Income sits in the month you earned it, next to the cost of earning it, so margins are meaningful.
It shows what is owed. Receivables and payables appear on your balance sheet, so you can see who owes you and what you owe.
Lenders and investors expect it. If you plan to borrow or sell, you will likely need accrual statements.
Its weakness is that profit is not cash. You can show a healthy accrual profit and still be unable to pay staff, because the money has not arrived. Read an accrual profit and loss report next to your aging report and your bank balance.
Which method can you use?
Many small US businesses can choose. For tax years beginning in 2026, a corporation or partnership other than a tax shelter can generally use the cash method if its average annual gross receipts over the three prior tax years are $32 million or less. That figure comes from IRS Revenue Procedure 2025-32, and it changes each year. Publication 538 still shows an older number, so check the current one.
That test does not cover every case. Some businesses have other rules, including those that sell goods from stock, and the position for sole proprietors needs its own check. Your accountant should confirm which methods apply to you.
Two practical points:
- Your first tax return generally sets your method. Changing later usually needs IRS approval, so choose carefully.
- Your tax method and your management reports do not have to match. Many owners file on one basis and read the other for decisions.
Rules outside the US are different, and this article covers the US only.
How to choose
Use this as a starting point for a conversation with your accountant.
| Your situation | Lean towards |
|---|---|
| Sole owner, paid on the spot, few bills | Cash |
| Paid at the time of service, little credit | Cash |
| You send invoices with 30-day terms | Accrual for management, ask about tax |
| Long projects billed in stages | Accrual |
| You hold stock | Ask your accountant, other rules can apply |
| You plan to borrow or sell the business | Accrual |
| You want to know which clients make money | Accrual |
The bigger your gap between doing work and being paid, the more cash accounting misleads you.
A simple habit: read both
Once a month, look at three things together: your accrual profit and loss, what customers owe you, and your bank balance. The first shows if you made money. The second shows when it should arrive. The third shows what you can spend today.
If accrual profit is rising and the bank is falling, you are profitable but collecting slowly. That is a late payment problem, not a sales problem, and our overdue invoice email templates are a good place to start.
How this works in Pacten
Pacten keeps a double-entry ledger, so invoices, payments and supplier bills post as they happen. That gives you accrual records by default. The profit and loss report can be read on an accrual or a cash basis, so you can flip between the two views of the same period.
The other reports, including the balance sheet, cash flow statement and trial balance, are accrual only, and the page says so. There is no tax report and Pacten does not file anything. Your accountant works from your CSV exports, and the finance reports guide lists what is available.
Frequently asked questions
- What is the main difference between cash and accrual accounting?
- Timing. Cash records income and expenses when money moves. Accrual records them when they are earned or incurred, so unpaid invoices and bills are included.
- Which is better for a small business?
- Cash is simpler and suits businesses paid on the spot. Accrual gives a truer picture if you invoice on credit. Many owners use accrual to manage and take advice on what to use for tax.
- Can a small business use accrual accounting?
- Yes. Any business can keep accrual books. For tax, some businesses must use accrual, and many can choose. As of 5 November 2026, the IRS gross receipts figure for tax years beginning in 2026 is $32 million for the test it describes.
- Can I switch from cash to accrual?
- You can usually change your internal reports at any time. Changing your tax method generally needs IRS approval, and there are adjustments to work through. Speak to your accountant before you switch.
- Does accrual accounting mean I pay tax on money I have not received?
- It can. Under accrual, income generally counts when earned, even if the invoice is unpaid at year end. That is one reason many very small businesses prefer the cash method where it is allowed.