When you're setting up your books for the first time, one of the first decisions you'll face is whether to use cash or accrual accounting. It sounds technical, but the concept is straightforward. Here's what each method means and how to decide which one is right for your business.
What Is Cash Accounting?
Cash accounting records income when you actually receive the money and expenses when you actually pay them. It reflects what's in your bank account right now.
Example: You complete a project in December and send an invoice. The client pays in January. Under cash accounting, that income is recorded in January — when the money arrived.
Cash accounting is simple, intuitive, and gives you a clear picture of your actual cash position at any moment.
What Is Accrual Accounting?
Accrual accounting records income when it is earned — regardless of when payment is received — and expenses when they are incurred, regardless of when they are paid.
Example: Using the same scenario, accrual accounting would record the income in December when the work was completed and the invoice was issued, even though the cash didn't arrive until January.
Accrual accounting gives a more accurate picture of long-term business performance, but it requires more careful tracking of receivables and payables.
Which Method Is Right for Your Business?
For most small businesses, cash accounting is the better starting point. Here's why:
- It's simpler to understand and maintain
- It directly reflects your cash flow — the lifeblood of a small business
- It's accepted by the IRS for most small businesses with annual revenue under $25 million
- It requires less accounting knowledge to manage correctly
Consider accrual accounting if:
- You carry significant inventory
- You have large amounts of outstanding receivables or payables at any time
- You are planning to seek investment or financing (investors expect accrual-based financials)
- Your revenue exceeds the IRS threshold for required accrual accounting
- Your accountant recommends it for your specific situation
Can You Switch Methods?
Yes, but it requires care. Switching from cash to accrual (or vice versa) mid-year means adjusting your books to avoid double-counting income or expenses. The IRS also requires you to file Form 3115 when changing accounting methods. If you're considering a switch, talk to your accountant first.
How EasyLedger Handles Both
EasyLedger supports both cash and accrual accounting. You can set your preferred method in Settings → Accounting Method and your reports will reflect the correct timing of income and expenses accordingly. If you're unsure which to choose, cash accounting is the default — and the right choice for most of our users.
As always, if you have specific questions about which method is right for your business, consult a qualified accountant. The decision can have tax implications, and getting it right from the start is worth the investment.