Cash or Accrual? How to Choose the Right Accounting Method for Your Small Business

Understanding Your Options: Cash vs. Accrual

When you are running a small business, bookkeeping can feel like a second language. One of your first big financial decisions is choosing how to record your money. The two main methods, cash basis and accrual basis accounting, work differently and affect everything from cash flow to taxes.

Here is how each one works.

Cash Basis Accounting: Simple and Straightforward

Cash basis accounting tracks money when it actually moves. You record income when you get paid and expenses when you pay them.

Example:

You invoice a client in September but get paid in October. Under cash basis, that income is recorded in October when the payment hits your account.

Why freelancers and small businesses in California and Oregon love it:

Downside: It does not always give a full picture. You might look profitable when bills have not cleared yet, or short on cash because a client has not paid you.

Cash basis accounting is like checking your wallet; what is in there is what you have.

To learn more, read QuickBooks’ guide to cash vs. accrual accounting.

Accrual Basis Accounting: Seeing the Bigger Picture

Accrual accounting records income when it is earned and expenses when they are incurred, even if the money has not changed hands yet.

Example:

You send an invoice in September but get paid in October. Accrual accounting records that income in September.

Why growing businesses prefer it:

Downside: Your books might not match your cash balance. You will need to track both cash flow and accrual numbers to stay balanced.

Accrual accounting is like checking your calendar; it shows what is coming up and what is owed.

Learn more in IRS Publication 538 on accounting methods.

Which Accounting Method Is Right for You?

Business Type	Recommended Method
Freelancer, artist, or consultant (no inventory)	Cash Basis
Business with inventory or financing needs	Accrual Basis
Startup focusing on simplicity	Cash Basis
Growing business forecasting long-term	Accrual Basis

Many small business owners in Santa Clarita and across Oregon start on cash basis and later switch to accrual as their businesses grow. You can make this change anytime by filing Form 3115 (Application for Change in Accounting Method).

The U.S. Small Business Administration offers excellent guidance on choosing the right method for your structure.

Common Mistakes Small Business Owners Make

1. Mixing both methods.

It confuses your records and complicates taxes.

2. Ignoring cash flow.

Even accrual users must watch actual money in and out.

3. Missing IRS requirements.

Certain industries, such as retail or manufacturing, must use accrual.

4. Skipping professional help.

A bookkeeper can help you stay compliant and stress-free.

If you are using QuickBooks Online, Xero, or Wave, you can view both cash and accrual reports, but your taxes must stick to one consistent method.

Real-World Analogy: Finding Your Financial Rhythm

Think of cash basis as checking your wallet. It tells you exactly what is there today—simple, honest, and easy to track.

Now think of accrual basis as checking your planner or calendar. It shows what you have coming in, what you owe, and how your month will look before the cash moves.

For many freelancers, artists, and small business owners, the right method depends on how you like to manage your rhythm.

Both methods have their place. The key is finding the one that helps you make confident decisions without losing focus on what you do best—your creative or professional work.

FAQs About Cash vs. Accrual Accounting

1. Does the IRS care which method I use?

Yes. Once you choose, you must stay consistent unless you file to change it. See IRS.gov for details.

2. Can I switch from cash to accrual later?

Yes. File IRS Form 3115 and work with your CPA to ensure your transition is accurate and compliant.

3. Which method saves more on taxes?

It depends. Cash basis can delay income taxes by recording only what you have been paid. Accrual provides accuracy but may reflect more taxable income.

4. Which is better for California or Oregon small businesses?

If you are a freelancer, creative, or small business owner in Santa Clarita, Los Angeles, or Portland, cash basis is simple and efficient. Accrual becomes better as your business scales, especially if you handle inventory or multiple clients.

5. How do I choose the right method for my business?

A professional bookkeeper can review your goals, revenue, and structure to guide you toward the best fit.

The Bottom Line

Your accounting method sets the tone for your entire financial story.

Either way, clear and accurate books will keep your business in tune all year long.

Helpful Resources