{"id":4641,"date":"2021-07-05T13:41:00","date_gmt":"2021-07-05T19:41:00","guid":{"rendered":"https:\/\/web.blockadvisors.com\/?p=4641"},"modified":"2025-01-24T10:13:40","modified_gmt":"2025-01-24T16:13:40","slug":"cash-vs-accrual","status":"publish","type":"post","link":"https:\/\/www.blockadvisors.com\/resource-center\/small-business-services\/cash-vs-accrual\/","title":{"rendered":"Cash vs. accrual accounting: Considerations for tracking your finances"},"content":{"rendered":"\n<p>As a business owner, you have many choices about how to operate your business. A key choice you or your tax or accounting professional should decide on prior to <a href=\"https:\/\/web.blockadvisors.com\/starting-your-own-business\/\">starting your business<\/a> is the accounting method you choose: cash vs. accrual.<\/p>\n\n\n\n<p>Each accounting method has benefits and drawbacks, which we\u2019ll identify in this post. Read on as we outline the basics of accrual vs. cash basis accounting!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-accrual-vs-cash-basis-accounting\">Accrual vs. cash basis accounting<\/h2>\n\n\n\n<p>First, let\u2019s outline the definition of each type of accounting method, so you can better understand each. While both methods recognize credits and debits, they do it in different ways. Let\u2019s dig in to understand those differences.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-accrual-accounting\">What is accrual accounting?<\/h2>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"alignright size-large\"><img decoding=\"async\" src=\"https:\/\/www.blockadvisors.com\/resource-center\/\/wp-content\/uploads\/2021\/07\/Business-choices.jpg\" alt=\"cash vs. accrual accounting\"\/><\/figure>\n<\/div>\n\n\n<p>Accrual accounting\u2019s goal is to match revenue and expenses over the course of the same time period. Financial transactions are recorded when you have a legal right to the cash, regardless of when a transaction is made.<\/p>\n\n\n\n<p>While accrual accounting shows a more transparent picture of your company\u2019s finances, its drawback is it can create cash flow issues. So, say your small business banking account is running low on funds and you have a major business expense you need to pay.<\/p>\n\n\n\n<p>Your bookkeeping records indicate you have the resources by using an accrual method of accounting, but you might not actually have the funds in your account to pay the expense because transactions that have been recorded but not paid to you happened within that time frame. Thus, you\u2019d go into a cash deficit.<\/p>\n\n\n\n<p>But it does have its advantages. Accrual basis of accounting offers a more holistic, long-term picture of your business\u2019s financial position than cash accounting.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-cash-basis-accounting\">What is cash basis accounting?<\/h2>\n\n\n\n<p>Cash basis accounting recognizes revenues as soon as cash is actually received \u2013 and when expenses are actually paid.<\/p>\n\n\n\n<p>Let\u2019s review an example that will better outline to differences between cash vs. accrual accounting. Simply put, if you get a check or payment from a client using the cash basis method, it\u2019s recorded at the time of payment. If you use this method, your business banking balance should reflect the exact resources you have at your disposal.<\/p>\n\n\n\n<p>By contrast, if you\u2019re using accrual accounting, your transaction would be recorded even before a payment was received \u2013 so after you invoice a client.<\/p>\n\n\n\n<p>One thing to note about the cash accounting method \u2014 You probably don\u2019t even realize you\u2019re already doing it for your personal accounting \u2013 it\u2019s the method most people use.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-the-importance-of-recorded-transactions-as-a-small-business-owner\">The importance of recorded transactions as a small business owner<\/h3>\n\n\n\n<p>Every small business should keep up on its bookkeeping. In fact, if you want to claim a tax deduction, credit, or otherwise, proper bookkeeping informs you or your tax preparer of the important information you need to file on your tax return in conjunction with your <a href=\"https:\/\/www.blockadvisors.com\/resource-center\/small-business-tax-prep\/tax-forms-for-small-businesses\/\">small business tax forms.<\/a><\/p>\n\n\n\n<p>There are great do-it-yourself bookkeeping resources out there such as <a href=\"https:\/\/www.waveapps.com\/\">Wave<\/a>, or you can outsource bookkeeping services to a pro. <a href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">Block Advisors bookkeeping services<\/a> can help you manage your bookkeeping tasks so you can focus on your business.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-should-you-use-cash-vs-accrual-accounting\">Should you use cash vs. accrual accounting?<\/h2>\n\n\n\n<p>Whether you use a cash basis vs accrual basis will depend on your business\u2019 unique situation and take several facets into consideration, such as overall profits, losses, <a href=\"https:\/\/web.blockadvisors.com\/business-entity-101\/\">business entity type<\/a>, number of shareholders, financial reporting preferences, and more.<\/p>\n\n\n\n<p>If your business is a <a href=\"https:\/\/web.blockadvisors.com\/llc-vs-c-corp-c-corporation\/\">C corp (vs. an LLC)<\/a> averaging $25 million in gross receipts over the course of three years, the IRS advises you to use the accrual method.<\/p>\n\n\n\n<p>However, if your business is not a corporation and has little cash on hand, you may want to use the cash method of accounting, so your business\u2019 cash flow is more visible. In fact, it\u2019s commonly used by sole proprietors or small businesses without inventory. Some small businesses without inventory can use the cash method, too. The income limits that require the accrual basis are high.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-get-help-for-your-bookkeeping-needs-and-more\">Get help for your bookkeeping needs and more<\/h2>\n\n\n\n<p>Whether your needs are <a href=\"https:\/\/www.blockadvisors.com\/small-business-tax-preparation\/\">small business tax preparation<\/a>, <a href=\"https:\/\/www.blockadvisors.com\/small-business-bookkeeping-services\/\">bookkeeping<\/a>, <a href=\"https:\/\/www.blockadvisors.com\/small-business-payroll-services\/\">payroll<\/a>, or even <a href=\"https:\/\/www.blockadvisors.com\/business-formation-incorporation-services\/\">registration<\/a>, our pros are your go-to small business partner. Let us do the heavy lifting so you can get back to what you love.<\/p>\n\n\n\n<p>See how we can help with your bookkeeping needs and answer your bookkeeping questions.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.blockadvisors.com\/small-business-payroll-services\/professional\/?app_method=BOOKKEEPING_METHOD\" target=\"_blank\" rel=\"noreferrer noopener\">Schedule a free bookkeeping consultation<\/a>.<\/p>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>As a business owner, you have many choices about how to operate your business. A key choice you or your\u2026<\/p>\n","protected":false},"author":1,"featured_media":4690,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[1237,15],"tags":[],"class_list":["post-4641","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-manage-your-business","category-small-business-services"],"acf":[],"yoast_head":"<title>Cash vs. Accrual Accounting for Businesses | Block Advisors<\/title>\n<meta name=\"description\" content=\"If you\u2019re starting or operating a business, it\u2019s good to get an understanding of accrual vs. cash basis accounting. 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