Cash vs Accrual Accounting

Recording money when it moves versus when it's earned or owed.

Also known as: cash vs accrual, accrual accounting, cash basis

Cash accounting records when money moves; accrual accounting records when value is earned or owed, regardless of movement. A December invoice paid in February is December revenue under accrual, February revenue under cash. Early startups often run cash-basis (simple, matches the bank); growth, investors and auditors demand accrual (matches reality).

cash:     invoice Dec, paid Feb → February revenue (bank says so)
accrual:  invoice Dec, paid Feb → December revenue + receivable (earned says so)

Accrual answers “how is the business doing?” (matching revenue to effort and period); cash answers “can we pay Friday?” Both questions matter, so mature companies keep accrual books and watch cash flow — the basis answers different questions, and confusing them misleads in both directions.

The classic mistakes:

Cash books hiding rot. Booming cash from annual prepayments masking collapsing renewals underneath. Accrual (especially deferred revenue tracking) reveals what cash conceals.
Accrual complexity premature. Full accrual machinery for a pre-revenue team burns accountant hours on precision nobody uses. Match method to stage: cash early, accrual as revenue, contracts and diligence demand it.
Tax-method mismatch. Some jurisdictions constrain which basis small businesses may use, and switching has consequences. Decide with the accountant, not by vibe.
Receivables/payables blindness under cash. Cash books ignore what is owed both directions until it moves — then everything arrives at once. Even cash-basis teams track aging schedules separately.
Revenue games under accrual. Channel stuffing, bill-and-hold, creative cutoffs — accrual’s judgment calls are gameable exactly where incentives point. Pair with revenue recognition discipline and audits as you scale.

Default path: cash simplicity while tiny, accrual books once revenue, contracts or investors require them — with cash-flow watching throughout regardless of basis. See P&L for reading accrual output.