The Cash or Accrual Method of Bookkeeping - Which do you Use?

I’m curious—what method of bookkeeping do you currently use in your business?

Do you know the difference between those two methods?

Many business owners focus on serving clients and generating income, and the technical side of bookkeeping often takes a back seat. Yet, the method you use to record your finances plays a major role in how clearly you understand your business’ performance.

There are two primary bookkeeping methods most businesses use: Accrual Accounting and Cash Accounting. The names might sound a bit “over the top,” but once we break them down, they’re actually quite easy to understand.

The Accrual Accounting Method

Accrual accounting is all about timing—specifically, recording financial activity when it happens, not when money moves in or out of your bank account.

In simple terms, income is recorded when it’s earned, and expenses are recorded when they’re incurred, regardless of when payment is made.

Let’s look at a real-world example.

Suppose you complete a job for a client in January and send your invoice right away. The client takes three to four weeks to pay you, and the funds hit your bank account in February. Under the accrual method, the income from that job is recorded in January, because that’s when the work was completed and the invoice was issued. When the payment arrives in February, it’s recorded as a payment received in February, but against that January invoice—it's not new income.

Expenses are treated the same way. If you receive a bill from a vendor in January but don’t pay it until February, the expense is recorded in January, when the obligation occurred. This approach matches income and expenses to the period in which they actually relate.

The result is a clearer, more accurate picture of how your business is truly performing month by month.

The Cash Accounting Method

The cash method is much more straightforward and, for many business owners, more intuitive. With cash accounting, income is recorded only when money enters your bank account, and expenses are recorded only when money leaves it. If there's no payment yet - then no transaction is recorded.

Using the same example as before: you deliver a product or service worth $500 in January, but the client doesn’t pay until February. Under the cash method, that $500 is recorded as income in February, because that’s when the money was actually received.

This method follows a simple rule:

• Cash comes in → record income

• Cash goes out → record an expense

It’s easy to understand, easy to maintain, and often appealing to small businesses just getting started.

So, Which Method Is Better?

Now here's the thing.

The cash method isn’t wrong. In fact, it works well for some small businesses, especially those with simple transactions, no inventory, and immediate payments. However, as your business grows, this method can start to fall short.

Why is that? Because it doesn’t always tell the full story.

With cash accounting, a month can look incredibly profitable simply because several clients paid late—or unprofitable because expenses were paid early. The timing of cash flow can distort how well your business is actually doing.

Accrual accounting, on the other hand, provides a more accurate view of your financial performance over any given period. It shows what you've earned, what you've spent, and what you owe—regardless of when cash changes hands. This makes it easier to analyze trends, plan ahead and make informed business decisions.

Choosing the right bookkeeping method is about more than convenience, it’s about clarity, accuracy and transparency. While the cash method may feel “easy peasy,” the accrual method often offers deeper insights into your business’ true financial health.

Regardless of which method you use, best practices in record-keeping are essential. Consistent, accurate records help you stay compliant and confident in your numbers. And when your books are clear, you’re better positioned to grow your business with intention and peace of mind.

If you’re unsure whether your current bookkeeping method is serving you well, it may be time to take a closer look—or get a little support. Your numbers should work for you rather than confuse you.