Cash vs. Accrual: Why the Way You Count Matters More Than You Think

Ever looked at your bank account and thought, “Wow, business is booming!” … only to realize two weeks later that half those deposits were late payments from last year, and oh look—your bills are stacked higher than your coffee mug?

Yep. That’s the magic (and chaos) of accounting methods.

The way you choose to count your money—cash vs. accrual—can completely change the story your numbers are telling. And trust me, it’s not just bean-counter nitpicking. This choice can affect your taxes, your decisions, and whether a bank gives you that loan you’ve been eyeing.

Let’s break it down.

Cash Basis: The “Check Your Wallet” Method

Cash basis accounting is the simple, gut-check way of keeping score. You only record income when the money actually hits your account and expenses when the money leaves.

Think of it like this: if you’ve been paid, it’s real. If not? Pretend it doesn’t exist.

Why people love it:

• It’s simple—no fancy spreadsheets needed.

• Your books line up nicely with your bank balance.

• Great for freelancers, solo hustlers, and tiny businesses.

The catch:

• It ignores money people owe you (and money you owe them).

• One big late payment can make your “December” look dead and your “January” look like you won the lottery.

Example: You do a $5,000 job in December, but the client pays in January. On cash basis, December looks like crickets. January looks like champagne.

Accrual Basis: The “Real Story” Method

Accrual accounting is about matching work with results. You record revenue when you earn it, and expenses when you owe them—whether or not the cash has moved yet.

Why people love it:

• It tells the truth about performance, not just cash flow.

• It shows what’s coming in (accounts receivable) and what’s going out (accounts payable).

• Lenders and investors prefer it. (So does the IRS once you hit certain revenue levels.)

The catch:

• It’s more complicated—you’ll probably want software or an accountant.

• You can look profitable on paper while your bank account is gasping for air.

Example: Same $5,000 job in December? Under accrual, you count it as December income, even if the client ghosts you until January.

Why This Isn’t Just an Accounting Geek Thing

Here’s why the method you pick matters:

1. Taxes – Cash basis can sometimes help delay income (and therefore taxes). Accrual may speed them up. Timing is everything.

2. Loans & Investors – Banks don’t care how much cash happened to land in your account last week. They want to know the real story.

3. Decision-making – Cash basis might trick you into thinking you’re rolling in profits (when you’re not). Accrual gives you the unvarnished truth.

So, Which One Should You Use?

• If you’re a freelancer, side hustler, or very small biz who just wants to keep things simple → go cash basis.

• If you’re a growing business, carry inventory, or want financing → you’re probably better off with accrual.

Pro tip: Lots of businesses start with cash basis, then switch to accrual as they scale. (Kind of like trading in your first car for something with power steering and Bluetooth.)

The Takeaway

Cash basis shows you what’s in your wallet. Accrual shows you the whole story. Neither is “wrong”—but picking the right one can save you taxes, help you plan better, and keep your business out of sticky cash-flow surprises.

👉 Bottom line: don’t sleep on this decision. If you’re unsure, grab a coffee with your accountant. The way you count matters way more than you think.