Cash basis vs accrual accounting: which one should your small business use?

Ask an accountant about cash basis versus accrual and you will get a lecture. Ask a small business owner and you will get a shrug and whatever the software defaults to. Both responses are understandable — but the choice does change what your books tell you, and it is worth understanding before the wrong one quietly misleads you for two years.

The difference in one paragraph

Cash basis counts money when it moves. Income is income on the day it lands in your account; an expense is an expense on the day it leaves. Accrual counts money when it is earned or incurred. You invoice in one month and get paid the next — accrual books the sale in the month you did the work, not the month the money arrived.

That is the whole difference. Everything else is consequences.

The December invoice test

The classic example. You finish a job on 28 December, invoice it, and the client pays on 9 January. On cash basis, December shows the cost of the job and none of the revenue; January shows revenue with no matching work. On accrual, both months tell the truth: December shows the job and the profit, January shows a payment against money already counted.

Now imagine your busiest month of the year falls at the end of a quarter. Cash basis will make your best month look like your worst. If you read your own reports — or worse, show them to someone — that matters.

What each one feels like

Cash basis feels like your bank balance. Simple, obvious, and honest about what you can spend today. Its weakness is timing: a big bill paid late flatters one month and wounds the next, and neither month looks like what actually happened.

Accrual feels like the work you did. It needs discipline — you have to keep track of invoices you have not been paid for and bills you have not paid yet — but the picture it draws is steadier, and it stops one slow-paying client from making you look unprofitable.

When the choice is already made for you

• Your tax authority says so. Many jurisdictions push businesses past a certain size — often by turnover, sometimes by inventory — onto accrual. The threshold is your accountant's to know, not yours to guess.
• You have a lender or investor. Banks and investors read accrual statements; cash-basis books answer fewer questions, and they know it.
• You hold stock. Inventory and cash basis do not mix well, because you paid for stock you have not sold yet.
• You invoice on terms. If clients pay you 30 or 60 days later, accrual is the only basis that shows how the business is actually doing.

If it is your call

Start simple. A young business with no stock, no borrowings and quick-paying clients is fine on cash basis — its books and its bank balance will roughly agree, and rough agreement is valuable early on. Switch to accrual when any of the four situations above appears, or when your accountant says the word. The switch is a bookkeeping exercise, not a decision of conscience; plenty of businesses do it once and never think about it again.

Whichever basis you run, the work underneath is the same: invoices out, bills in, and the two kept in order. That part Spheyas does on every plan — full invoicing and accounting, with the free plan included — and if you want the day-to-day side explained, the help centre covers how sharing documents with clients works.