One of the first decisions in setting up your books is which accounting basis to use: cash or accrual. It sounds technical, but it changes what your financial statements tell you and, in some cases, what you owe in tax. Here is the difference in plain terms and how to think about which fits your business.
Cash basis
On a cash basis, you record income when money actually arrives and expenses when they are actually paid. It is simple and it mirrors your bank account, which makes it appealing for very small or service-only businesses. The downside is that it can misrepresent performance: a big customer payment or a large supplier bill can swing a month dramatically, even if the underlying work happened in a different period.
Accrual basis
On an accrual basis, you record income when it is earned and expenses when they are incurred, regardless of when cash moves. Invoice a client in March and the revenue lands in March, even if they pay in May. This matches revenue with the costs that produced it, so your Profit & Loss reflects true performance for the period. It is the basis most lenders, investors, and accountants expect, and it is generally required once a business reaches a certain size or carries inventory.
Which one fits
Cash basis can be fine for a lean service business that wants simplicity. But if you carry inventory, sell on terms, run promotions, or plan to raise financing, accrual gives a far more accurate picture and is often necessary. Many businesses start on cash and switch as they grow.
What changes when you switch
Moving from cash to accrual is not just a setting. It means recognizing accounts receivable and payable, recording accruals and prepaid expenses, and restating opening balances so the transition is clean. Done properly, the switch gives you comparable, decision-ready numbers. Done carelessly, it double-counts income or expenses.
Choosing the right basis and running a clean transition is part of how we set up and maintain client books. If you are unsure which basis you are on, or whether you should switch, reach out.
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