Cash vs. Accrual Accounting:
Which Should Your Business Use?
The method you pick decides whether you can see the truth about your own business — and whether a bank will lend to it. Cash feels simpler; accrual tells the truth and is what lenders want. From someone who read these from the lender's side of the desk.
Two owners can run the exact same business and reach opposite conclusions about whether it's healthy — because one keeps cash-basis books and the other keeps accrual. On cash, a big collection month feels like a windfall, so you hire and spend... right before the lean month you never saw coming. Or you walk into the bank for a loan, and cash-basis books simply can't tell the story an underwriter needs — so the answer is no.
That's the real stakes hiding inside a question that sounds like bookkeeping trivia: the method you choose decides whether you can see the truth about your own business — and whether anyone will lend to it. I spent years reading these financials from the lender's side of the desk, so here's how to pick the method that keeps you honest with yourself and fundable to everyone else.
By Carrie Anderson — Co-Founder, 406 Consulting Group. Commercial banking and underwriting background — 300+ business loans reviewed — so she knows exactly what a lender's eye looks for when the financials hit the desk.
Quick Answer
- →Cash = record it when money moves. Accrual = record it when it's earned or owed.
- →Most small businesses under the IRS gross-receipts threshold (indexed — roughly $30 million for 2025; confirm the current figure with the IRS) can file on cash.
- →Accrual tells the truth about profit — essential for contractors with work in progress and anyone carrying receivables, payables, or inventory.
- →Keeping accrual books for management and filing on cash for the return is legitimate and common.
The two methods, in plain English
Cash basis is the checkbook view: income shows up when the deposit clears, and an expense shows up when you actually pay it. It's simple, it's intuitive, and it ties neatly to your bank balance. Accrual basis records income when you've earned it — the job's done, the invoice is out — and records expenses when you've incurred them, even if the bill isn't paid yet. The whole point of accrual is matching: putting the revenue from a job next to the costs of that same job, in the same period, so the profit number means something.
Cash basis
Record income when the money arrives, expenses when you pay. Simple, bank-balance friendly, easy at tax time.
Accrual basis
Record income when earned, expenses when incurred. Matches revenue to its costs — the truer read on profit.
Cash vs. accrual, side by side
| Cash | Accrual | |
|---|---|---|
| Timing | When money moves | When earned or incurred |
| Simplicity | Simple to keep | More involved |
| Truth of the picture | Can mislead on profit | Truer read on profit |
| What lenders want | Rarely enough on its own | What they ask for |
| Best for | Simple, service-only shops | Contractors, AR/AP, inventory |
Who can use cash? Most small businesses. Under current rules, a business whose average annual gross receipts fall under the IRS threshold — raised under the 2017 tax law and indexed for inflation, in the neighborhood of $30 million for 2025 — can generally use the cash method for taxes. Confirm the current threshold with the IRS (Publication 538, Accounting Periods and Methods), and confirm your own situation — this is general information, not tax advice.
Why accrual tells the truth
Cash basis can flatter you or scare you for no real reason. Collect a big deposit in December and you look wildly profitable — even if most of that money is owed to suppliers and crews in January. Pay a stack of bills at once and you look like you lost money in a month you actually did fine. Accrual cuts through that noise by putting earnings and their costs in the same period. If you carry accounts receivable (customers owe you), accounts payable (you owe vendors), or inventory, cash basis is hiding part of the story.
Contractors feel this hardest. A job runs for months, costs pile up before the draws come in, and cash basis makes the P&L lurch around with billing timing instead of showing real margin. That's why contractors need accrual plus a work-in-progress (WIP) schedule — it's the only way to see whether a job is actually making money while you can still do something about it.
When a loan file crosses my desk, cash-basis statements raise questions and accrual statements answer them. If you ever plan to borrow, bond, or sell, accrual isn't a nicety — it's the language the other side of the table reads in.
The "two sets of books" reality
Here's the move most owners don't realize is on the table: you can run the business on accrual and still file your tax return on cash. That's not a loophole — it's a legitimate, common setup. You get the accrual management books that show true profitability month to month, and you get the cash-basis tax returnthat's simpler and can defer income to when it's actually collected. One set of accurate records, two presentations, each doing its job.
Picture Big Sky Builders, a Bozeman general contractor. On cash basis its best-ever "profit" month was really just a pile of client draws that owed out to subs the next week — and its worst month was the one where it prepaid materials for three jobs. Switch to accrual management books with a WIP schedule and the real picture appears: steady margin, one job quietly underwater, and a tax return still filed on cash to keep it simple. (Illustrative scenario.) When to switch? When you take on WIP, carry meaningful AR or AP or inventory, or when a lender, bonder, or buyer enters the picture — that's the signal cash basis has stopped telling you enough.
Not sure which rung your financials are on? Our Financial Maturity Assessment places you in about 2 minutes, and our bookkeeping team can set up accrual management books while keeping your return simple.
FAQ
Which method is simpler?
Cash basis, by a wide margin. You record income when the money arrives and expenses when you pay, so it tracks closely to your bank account and takes less effort to maintain — which is exactly why most small businesses that qualify use it for their tax return. The trade-off is that simplicity can hide the truth about profitability, especially if you carry receivables, payables, or inventory. Confirm your eligibility and situation with the IRS or your tax advisor.
Can I use cash basis for taxes but accrual to run the business?
Yes, and for a lot of businesses it's the best of both worlds. You keep accrual management books that show true, matched profitability month to month, and you file the tax return on the cash method to keep it simpler and defer income to when it's actually collected. It's a legitimate, common setup — one set of accurate records presented two ways. We build exactly this for clients so the numbers they run the business on and the numbers they file on both do their job.
When should I switch to accrual?
Switch (at least for your management books) when cash basis stops telling you enough: you've taken on work in progress, you carry meaningful accounts receivable, accounts payable, or inventory, or a lender, bonding company, or potential buyer has entered the picture and wants to see real profitability. Contractors usually need accrual plus a WIP schedule well before anyone forces the issue. Confirm any change in tax method with the IRS or your tax advisor, since switching methods for the return has its own rules.
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Cash vs. Accrual
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