Accrual vs Cash Accounting
Also known as: Cash Basis Accounting, Accrual Basis Accounting
Cash accounting records money when it moves; accrual accounting records it when it is earned or owed, regardless of when it is paid.
What it actually means
The difference is timing. Under cash basis, a January invoice paid in March is March revenue. Under accrual basis it is January revenue, and the unpaid amount sits in accounts receivable until collected. Cash basis is simpler and shows what is actually in the bank; accrual matches revenue to the work that produced it and expenses to the period they belong to, which makes month-to-month comparisons meaningful. Businesses that invoice on terms, carry inventory, or prepay for things often find cash basis misleading — a strong month can look flat because the payments landed late. Which basis you are required to use is a question for your CPA.
You finish a $4,000 job on March 28 and get paid April 12. Cash basis calls it April revenue; accrual basis calls it March.
A contractor billing net-30 sees a distorted picture on cash basis: the month with the most work booked can look like the worst month because payment arrives four weeks later. Accrual puts the revenue where the work actually happened.
Related terms
Accounts receivable is money customers owe you for work already delivered but not yet paid for.
Accounts payable is money your business owes suppliers and vendors for goods or services already received but not yet paid for.
A profit and loss statement shows revenue, costs, and expenses over a period of time, ending with the profit or loss that is left.
A cash flow statement tracks the actual money moving in and out of your business over a period, separate from profit on paper.
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