What's The Difference Between Cash and Accrual Accounting?

Question: What’s the difference between cash and accrual accounting?

Answer: Cash or accrual accounting refers to the timing of when income and expense events are officially recorded.

Cash basis means income is included in your income statement when you actually receive payment from your customer. Similarly, the expenses are recorded the date you actually make payment (including credit card payments).

Most small businesses are on a cash basis.

The accrual basis means income is recorded on the date you invoice your customer and expenses are recorded as soon as a bill has been created in your accounting system adding it to accounts payable.

Large businesses beyond a certain level of income are required to use an accrual basis to better reflect the current state of the company.

When you file your first business tax return, it will be either on a cash or an accrual basis. This will be the basis you will use during the life of your business unless otherwise directed by your CPA. There needs to be a valid reason to switch bases, and it should only be done once.

QuickBooks allows you to toggle between the two bases to view reports. Seeing your balance sheet and Income statement, both on a cash and accrual basis, can provide valuable information not just for tax purposes, but for planning and cash flow information.

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