Ask most business owners which accounting method they use, and you’ll get a blank look. Yet this one decision quietly shapes every report you see: your profit and loss, your tax picture, and even how healthy your business appears on paper. It’s worth understanding.
The Two Methods in Plain Language
Cash basis records income when money lands in your account and expenses when money leaves. It’s simple and easy to follow, and it feels intuitive: if the money isn’t in the bank, it hasn’t happened yet.
Accrual basis records income when you earn it and expenses when you incur them, whether or not money has changed hands yet. If you send an invoice today, it counts as revenue today, even if the client pays next month.
Why the Difference Matters
Imagine you finish a large job in October, but the client pays in November. On a cash basis, October looks slow and November looks great. On an accrual basis, the work shows up in October, when you actually did it. Neither is “wrong,” but they tell different stories.
Cash basis is often easier and shows what’s in your account. Accrual basis gives a more accurate picture of how your business is really performing month to month, especially if you invoice clients, carry inventory, or have bills that come due later.
Questions Worth Asking
- Do I invoice customers and wait to be paid?
- Do I owe vendors that I haven’t paid yet?
- Do I need financial statements for a lender or investor?
- Is my current method giving me a true picture of my business?
A Note Before Changing Anything
The method you use affects your taxes, and switching typically involves your tax return and, in many cases, IRS requirements. Talk with your tax professional before making a change. Your books should then be set up and maintained to match whatever method you choose.
“Through wisdom is a house builded; and by understanding it is established.” — Proverbs 24:3
Understanding the foundation of your books is the first step to building something that lasts. We’d love to help.
Learn more at abundantgracebooks.com
Peace and blessings,
Monica Martin and the Abundant Grace Bookkeeping Team
Grace for your books; freedom for your business.
