Cash vs. Accrual Accounting

Cash or accrual? All small businesses need to choose one of these methods of accounting.

It's important to understand the basics of the two principal methods of keeping track of a business's income and expenses: cash method and accrual method (sometimes called cash basis and accrual basis). In a nutshell, these methods differ only in the timing of when transactions, including sales and purchases, are credited or debited to your accounts. The accrual method is the more commonly used method of accounting.

Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction.

Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.

1 of 3 NEXT