Cash versus Accrual: What’s better for your business?
What is the cash method?It is as simple as it sounds: you record income as it’s received and expenses as they’re paid. For example, if you invoice a client for $1,000 on March 1 and receive payment on April 15, you would record the income for April. And on the other side, expenses are checked when the money leaves your account, not when you made the purchase.Advantages:
- Ease and simplicity (see also: little bookkeeping!)
- Improved control over cash flow
- Fuzzy financial picture (expenses and payables bleed between months)
- Difficult to track outstanding payments and bills
What is the accrual method?
Income and expenses are recorded when they’re billed and earned, regardless of when the money is actually received. For instance, if you bill $1,000 in income on March 1, you would record the income in March — even if you weren’t paid until June. Same for expenses.
- Immediate accuracy and clear long-term view on sales
- Better performance metrics for tracking business trends
- More accurate financial picture
- Resource-intensive (see also: lots of bookkeeping!)
- Inaccuracies between your bank account and your books
So is better for my business?
The answer is, whichever method feels more comfortable. If you prefer immediate accuracy and don’t mind the extra bookkeeping, go for accrual. But for most, we tend to prefer the cash method. It’s easier and simpler and allows for more control during tax season to defer income until payments are received.