Cash vs. accrual accounting: Which method makes sense for your business?

If you're running a business, your accounting method isn’t just a back-office detail—it directly shapes how you understand performance, plan growth, and file taxes. And when it comes to accounting methods, the decision often comes down to one fundamental choice: cash vs. accrual accounting.

These two approaches differ in how and when income and expenses are recorded. While the cash method is straightforward and widely used by small businesses, the accrual method offers a more complete financial picture—especially as operations become more complex.

In this guide, we’ll break down how each method works, compare their pros and cons, and help you determine which approach best fits your stage of growth, reporting needs, and compliance obligations.

What is cash accounting?

Cash accounting is a method where revenues and expenses are recorded only when cash is actually received or paid. This approach is straightforward and commonly used by small businesses and sole proprietors.​

Key characteristics:

• Revenue recognition: Income is recorded when payment is received.
• Expense recognition: Expenses are recorded when they are paid.
• Simplicity: Easy to implement and understand, making it suitable for businesses with straightforward transactions.
• Cash flow focus: Provides a clear picture of cash on hand, aiding in short-term financial planning.

For instance, if you invoice a client in December but receive payment in January, the income is recorded in January under cash accounting.​

What is accrual accounting?

On the other hand, accrual accounting records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged. This method aligns with Generally Accepted Accounting Principles (GAAP) and provides a more accurate financial picture, especially for larger or more complex businesses.

Key characteristics:

• Revenue recognition: Income is recorded when earned, even if payment is received later.
• Expense recognition: Expenses are recorded when incurred, not necessarily when paid.
• Matching principle: Ensures that revenues and related expenses are recorded in the same accounting period.
• Comprehensive financial view: Offers a more accurate representation of a company's financial health over time.

Back to our earlier example: If you complete a service in December and invoice the client, the income is recorded in December, even if payment is received in January.

Accrual vs. cash: What’s the real difference?

Now that you’ve seen how each method works, it’s important to understand how they shape your financial strategy in practice.

The choice between cash and accrual accounting affects more than just your books—it can influence everything from tax obligations to investor appeal. 

While cash accounting gives you a straightforward view of your bank balance, accrual accounting offers deeper insight into profitability, especially for businesses with inventory, invoicing cycles, or growth goals.

Here’s a quick summary of how the two methods compare across key business criteria:

Cash Accounting

• Revenue recognition: When cash is received
• Expense recognition: When payment is made
• Cash flow visibility: High — tracks actual bank activity
• Accuracy of performance: Limited — may distort the timing of profits and losses
• Ease of use: Simple and great for lean teams
• Tax impact: Taxes are paid on money actually received
• Regulatory alignment: Acceptable for many small businesses
• Best for: Freelancers, sole proprietors, and businesses with under $25 million in revenue

Accrual Accounting

• Revenue recognition: When income is earned
• Expense recognition: When the obligation is incurred
• Cash flow visibility: Lower — may not reflect cash on hand
• Accuracy of performance: High — aligns revenue and expenses properly
• Ease of use: More complex and may require accounting tools or support
• Tax impact: Taxes are owed on revenue recognized, regardless of payment
• Regulatory alignment: Required by GAAP and often preferred by investors
• Best for: Growth-stage, inventory-based, or investor-facing companies

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Advantages of cash basis accounting for small teams

For a lot of early-stage teams, accounting doesn’t need to be complicated. 

You likely just want to track what’s coming in, what’s going out, and keep your books clean enough to file taxes without stress. 

That’s where cash basis accounting shines. It’s simple, clear, and—depending on your business model—may be all you need. Let’s look at some of the top advantages of cash basis accounting.

1. It’s easy to use (and understand)

Cash basis accounting is intuitive, you record money when it moves. It works just like your bank account, so you always know exactly how much cash you have on hand. There’s no need to track accounts receivable or payable. 

This simplicity reduces the learning curve and administrative burden, making it accessible for business owners without formal accounting training. 

2. Clear cash flow visibility

Because you’re only logging actual payments, it’s easier to manage your spend in real time. 

If your balance looks healthy, it really is. That’s helpful when you're making decisions day-to-day—like whether you can afford to hire or need to tighten things up.

3. Cost-effectiveness

The straightforward nature of cash basis accounting often means businesses can manage their books without hiring specialized accounting staff or investing in complex software, leading to cost savings.

In fact, many founders would be able to handle cash accounting themselves or with lightweight software. 

Fewer moving parts also means fewer mistakes—especially if your business doesn’t deal with inventory or receivables.

4. Potential tax advantages

With cash accounting, you're not taxed on income until the money hits your bank account. So if you send an invoice in December but don’t get paid until January, that revenue shows up on next year’s tax return—not this one.

That gives you more control over your taxable income. For example when you’re near the end of the year, you can be strategic—deferring some invoices or accelerating expenses if needed to reduce your current tax bill.

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Why accrual accounting is better for growing companies

If cash accounting is great for keeping things simple, accrual accounting is what gives you the full picture. This will start to matter more as your business expands and your financial operations become far more complex.

When you’re dealing with bigger contracts, staggered payments, or recurring revenue, you need to know what you’ve earned—even if the cash hasn’t hit your account yet. That’s where accrual comes in.

1. You get a more accurate snapshot of performance

Accrual accounting records revenue when it’s earned and expenses when they’re owed. That means your books reflect the real work you’re doing—not just the money sitting in your bank account. It helps you answer: Are we actually profitable this month? Or just waiting on a bunch of invoices?

2. Planning and forecasting get easier

Because accrual captures everything that’s in motion—what’s coming in and going out—it gives you a clearer sense of where you stand and what’s ahead. That makes it easier to budget, model cash flow, and prepare for big decisions.

3. It meets expectations from investors and accountants

If you’re aiming to raise capital, get acquired, or just have cleaner financials, accrual accounting is usually a must. It follows GAAP standards, which are considered the norm by lenders, accountants, and anyone reviewing your books seriously.

4. It’s built for more complex operations

Recurring revenue, long payment cycles, inventory—these things don’t play nicely with cash accounting. Accrual gives you a framework to track them properly so you don’t end up overestimating your available funds or missing key expenses.

IRS rules: Who can use cash vs. accrual accounting?

Choosing between cash and accrual accounting is also about complying with IRS regulations. 

For context, the IRS has rules about which method you’re allowed to use. These rules exist to make sure businesses report income and expenses consistently, and in a way that aligns with their size and structure.

The good news? Most small businesses have some flexibility. But there are certain thresholds and business types that must follow stricter requirements—especially when it comes to using accrual accounting.

Here are the most important things to know:

1. Most small businesses can use cash accounting

If your business brings in $25 million or less in average annual gross receipts over the last three years, you’re generally allowed to use the cash method. 

This threshold was established by the Tax Cuts and Jobs Act (TCJA) and is adjusted each year for inflation. The cash method is often simpler and more straightforward for small businesses.

2. Accrual accounting is required for certain businesses

While a lot of businesses can choose their method, the IRS requires others to use accrual accounting—especially if:

• You hold inventory: If selling physical goods is a key part of your business, accrual accounting is usually required to properly match your revenue and expenses.
• You’re a C corporation (or a partnership with a C corp as a partner): These business types are typically expected to use the accrual method, even if they’re under the revenue threshold.
• You’re considered a “tax shelter”: These entities must also follow accrual rules by default.

You can find more detail in IRS Publication 538, which lays out how and when these rules apply.

How to know when it’s time to switch accounting methods

If you're already using the cash method, there may come a point when it no longer gives you the clarity or structure you need to run your business effectively. 

That’s when it’s worth asking: Is it time to move to accrual?

Signs it might be time to switch:

• You’re managing receivables and payables regularly: If you’re tracking outstanding invoices or upcoming bills outside of your accounting system, that’s a sign the cash method isn’t telling the full story.
• You have inventory or recurring revenue: Accrual is better suited for businesses that sell physical goods, manage stock, or run on monthly subscriptions—it reflects earnings more accurately across periods.
  
  
• You need better performance insights: Cash-based books can fluctuate based on when payments land, even if business activity is steady. Accrual helps you evaluate true profitability month over month.
  
  
• You’re preparing for growth or outside funding: Lenders, investors, and even some partners often expect GAAP-aligned reporting, which accrual accounting provides by default.

What the IRS requires if you decide to switch:

To officially change your accounting method, the IRS requires you to file Form 3115, Application for Change in Accounting Method. This ensures consistency in how your income is reported going forward.

It’s a formal process, but very manageable—especially if your business is growing and the move makes sense. 

You may also want to loop in a bookkeeper or accountant to help reconcile your records during the transition.

Tools to support your accounting method

No matter which method you use—cash or accrual—you’ll want tools that make it easier to stay organized, accurate, and compliant. 

At Rho, we’ve built our platform to support growing businesses across both approaches. Here’s how we help:

• Seamless integrations with popular accounting platforms like QuickBooks Online, NetSuite, Sage Intacct, and Microsoft Dynamics 365—so your transactions flow directly into your books without extra work.
• Automated expense tracking and controls that save your team time and reduce manual errors. Set spend policies, streamline approvals, and ensure every transaction is coded correctly.
• Real-time visibility into spend, cash flow, and budgets—giving you the insight you need to make smarter financial decisions, no matter your accounting method.
  
  

Choose the method that fits your growth

Whether you stick with cash accounting or move to accrual, what matters most is having a system that reflects how your business actually operates—and helps you plan for what’s ahead.

At Rho, we’ve built a financial platform designed to grow with you. Our corporate cards give you real-time control over spend, while expense management tools make tracking and coding purchases easy—no more messy spreadsheets. 

You can also streamline payments with AP automation, manage liquidity with treasury tools, and sync it all seamlessly with your accounting software.

Whichever method you choose—cash, accrual, or a future shift from one to the other—Rho is built to support smarter, faster financial decision-making. Want to hear how Rho works for your business? Schedule a quick demo with our team today.