Accrual vs Cash Accounting: Which Is Best for Your Business? (With Real-World Examples)
Choosing between accrual and cash accounting isn’t just a “paperwork decision”—it’s about getting the right financial insights to run your business. One method tracks money when it moves (cash accounting), while the other tracks it when it’s earned or owed (accrual accounting).
The wrong choice can hide profits, skew cash flow, or even lead to bad decisions (like thinking you can afford a new tool when you really owe money). In this guide, we’ll break down accrual vs cash accounting with simple definitions, side-by-side comparisons, and practical journal entry examples—so you can pick the method that fits your business (whether you’re a freelancer, café owner, or e-commerce seller).
First: What Are Accrual and Cash Accounting, in Plain Language?
Before diving into differences, let’s start with the basics—both methods answer one question: When do you record revenue and expenses? But their answers are very different.
Cash Accounting: “Record When Cash Changes Hands”
Cash accounting is the simplest method: you only record revenue when you receive cash (e.g., a customer pays you) and expenses when you spend cash (e.g., you write a check for rent).
It’s like keeping a personal checkbook: if money doesn’t hit or leave your bank account, it doesn’t get recorded.
Example: You’re a freelance graphic designer. You finish a project in October, but the client pays you $1,500 in November. With cash accounting, you record the $1,500 revenue in November—not October.
Accrual Accounting: “Record When Money Is Earned or Owed”
Accrual accounting follows the “matching principle”: you record revenue when you earn it (e.g., finish a project, deliver a product) and expenses when you owe them (e.g., receive a service, buy supplies)—even if cash hasn’t changed hands yet.
It’s like tracking “promises to pay”: if you do work for a client, you record the revenue immediately (even if they pay later). If you get a utility bill, you record the expense immediately (even if you pay it next month).
Example: Using the same freelance project: you finish the work in October, so you record the $1,500 revenue in October. When the client pays in November, you just update your “accounts receivable” (what they owe you) to “cash”—no new revenue is added.
Accrual vs Cash Accounting: Side-by-Side Comparison
To see how these methods play out in real business, let’s compare them across 6 key areas—with a small café as an example.
| Category | Cash Accounting | Accrual Accounting |
|---|---|---|
| When to record revenue | When cash is received (e.g., a customer pays for coffee with a card). | When earned (e.g., the customer receives their coffee—even if they charge it to a tab). |
| When to record expenses | When cash is spent (e.g., you write a check to your coffee supplier). | When incurred (e.g., you receive a delivery of coffee beans—even if you pay the supplier later). |
| Financial clarity | Shows cash flow (how much money is in the bank) but hides true profitability. | Shows profitability (how much you earned vs. spent) but not just cash flow. |
| Compliance | No GAAP requirement—good for small businesses with <$26M annual revenue. | Required by GAAP (Generally Accepted Accounting Principles) for businesses with >$26M revenue or inventory. |
| Journal entry complexity | Simple (only cash in/cash out). | More detailed (tracks accounts receivable, payable, accruals). |
| Best for | Freelancers, sole proprietors, or small businesses with no credit transactions. | Businesses with credit sales, inventory, or long-term projects (e.g., cafes, e-commerce, contractors). |
Real-Café Example: How Both Methods Track a Month of Business
Let’s say your café has 3 key transactions in December 2025:
- Sold $8,000 in coffee (all cash except $500 charged to a local business’s tab—they’ll pay in January).
- Bought $2,000 in coffee beans (received in December, paid in January).
- Paid $1,200 in rent (for December, paid in December).
Cash Accounting: December Results
- Revenue: $7,500 (only cash sales—excludes the $500 tab).
- Expenses: $1,200 (only rent—excludes the $2,000 beans).
- Profit: $7,500 – $1,200 = $6,300.
Problem: This overstates profit—you owe $2,000 for beans, and the $500 tab could be late (or unpaid).
Accrual Accounting: December Results
- Revenue: $8,000 (all sales—includes the $500 tab, since it’s earned).
- Expenses: $3,200 ($2,000 beans + $1,200 rent—both incurred in December).
- Profit: $8,000 – $3,200 = $4,800.
Advantage: This shows your true profit—you earned $8,000 but spent $3,200 to generate that revenue.
Journal Entry Examples: Accrual vs Cash Accounting
Journal entries are how you record transactions—and the two methods use very different entries. Let’s use the café example above to see the difference.
1. Recording Sales (Including a $500 Tab)
Cash Accounting Entry (December)
Only record cash received ($7,500)—the $500 tab is ignored until January:
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Cash | $7,500 | |
| Sales Revenue | $7,500 |
Accrual Accounting Entry (December)
Record all $8,000 in sales—$7,500 cash + $500 tab (accounts receivable):
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Cash | $7,500 | |
| Accounts Receivable | $500 | |
| Sales Revenue | $8,000 |
When the tab is paid (January, accrual method): Update accounts receivable to cash—no new revenue:
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Cash | $500 | |
| Accounts Receivable | $500 |
2. Recording Coffee Bean Purchase (Received Dec, Paid Jan)
Cash Accounting Entry
Ignore the purchase in December—only record when cash is spent (January):
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Inventory (Beans) | $2,000 | |
| Cash | $2,000 |
Accrual Accounting Entry (December)
Record the expense when beans are received (incurred)—even if unpaid:
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Inventory (Beans) | $2,000 | |
| Accounts Payable | $2,000 |
When you pay the supplier (January, accrual method): Update accounts payable to cash—no new expense:
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Accounts Payable | $2,000 | |
| Cash | $2,000 |
3. Recording Rent (Paid Dec for Dec)
Both methods record this the same way—since cash is spent and the expense is incurred in the same month:
| Account Name | Debit Amount | Credit Amount |
|---|---|---|
| Rent Expense | $1,200 | |
| Cash | $1,200 |
How to Choose: Accrual vs Cash Accounting for Your Business
Use this 3-step checklist to pick the right method—no accounting degree required.
Step 1: Check Your Business Size and Type
- Choose cash accounting if:
- You’re a freelancer, sole proprietor, or micro-business (e.g., dog walker, Etsy seller).
- You have no credit transactions (all customers pay upfront, all suppliers require upfront payment).
- Your annual revenue is <$26M (the IRS threshold for mandatory accrual accounting).
- Choose accrual accounting if:
- You sell on credit (e.g., customers pay later, like a B2B contractor).
- You have inventory (e.g., a café, boutique, or e-commerce store).
- Your annual revenue is >$26M (required by GAAP and IRS rules).
- You need to track profitability (not just cash flow) to make decisions.
Step 2: Ask “What Do I Need to See in My Books?”
- If you need to know “how much cash is in the bank right now”: Cash accounting works.
- If you need to know “am I actually making a profit this month”: Accrual accounting is better.
Example: A freelance writer with 5 clients who pay upfront can use cash accounting—they just need to track cash flow. A web designer who bills clients net-30 (payment due in 30 days) needs accrual accounting—otherwise, they’ll think they’re profitable in months when clients pay, but not in months when they do the work.
Step 3: Consider Future Growth
Cash accounting is easy to start with, but it won’t scale. If you plan to:
- Hire employees,
- Get a business loan (lenders prefer accrual books),
- Sell your business (buyers want accrual financials),
you’ll need to switch to accrual accounting eventually. It’s easier to start with accrual than to switch later.
Can You Switch Between Methods?
Yes—but you need to follow IRS rules. Here’s how:
When to Switch
Most businesses switch when they hit the $26M revenue threshold, start selling on credit, or add inventory. The best time to switch is the first day of a new tax year (e.g., January 1) to avoid mid-year confusion.
How to Switch
- Notify the IRS: File Form 3115 (Application for Change in Accounting Method) to get approval.
- Adjust your books: For accrual accounting, you’ll need to record:
- Accrued revenues (money owed to you for work done before the switch).
- Accrued expenses (money you owe for expenses before the switch).
- Deferred revenues (cash you received but haven’t earned yet).
- Deferred expenses (cash you spent but haven’t used yet).
- Update your tools: If you use accounting software (e.g., QuickBooks, Xero), switch the method in your settings and reconcile past transactions.
Common Myths About Accrual vs Cash Accounting
Let’s debunk 3 myths that trip up small business owners:
Myth 1: “Accrual Accounting Is Too Hard for Beginners”
Truth: It’s only more work if you have credit transactions—and even then, accounting software (like QuickBooks) automates most accrual entries. For example, when you invoice a client, the software automatically records “accounts receivable” and “revenue.”
Myth 2: “Cash Accounting Shows My True Profit”
Truth: Cash accounting hides profit (or losses). If you do $10,000 in work in December but get paid in January, cash accounting will make December look unprofitable and January look overly profitable. Accrual accounting fixes this by matching work to revenue.
Myth 3: “I Can Use Both Methods”
Truth: You can’t use both for tax purposes—you have to pick one and stick with it for the year. However, you can use cash accounting for day-to-day cash flow tracking and accrual accounting for official financial statements (but this requires extra work).
Final Takeaway: It’s About Fit, Not Perfection
Cash accounting is simple—it’s great for small businesses that just need to track cash. Accrual accounting is more detailed—it’s great for businesses that need to track profitability and scale.
You don’t have to overcomplicate it:
- If you’re a freelancer with no credit clients: Start with cash accounting.
- If you have a café with inventory and tab customers: Start with accrual accounting.
And remember—you can always switch later. The most important thing is to choose a method that helps you understand your business and make better decisions.