Two small business owners can do exactly the same work in December and see different profits on their December reports. The difference is usually not the work. It is the basis the books are read on, and that is what cash vs accrual accounting comes down to.
The short answer: cash accounting records income when money arrives and expenses when they are paid. Accrual accounting records income when it is earned and expenses when they are incurred. Cash is simpler and shows when money moved; accrual shows more truly how the business performed each month. Which one you file taxes on is a decision for your CPA.
Cash vs accrual, side by side
| Cash basis | Accrual basis | |
|---|---|---|
| Income is recorded | When the money arrives | When the work is done and invoiced |
| Expenses are recorded | When they are paid | When they are incurred |
| Best at showing | When money moved | How the month really went |
| Unpaid invoices and bills | Not on the reports | On the reports |
| In QuickBooks Online | One report setting | One report setting |
The difference in one example
Say you finish a job on December 20 and invoice $5,000. The customer pays on January 10. In December, you also buy $1,000 of materials for that job on a card you pay off in January.
- On the cash basis, December shows neither. January shows the $5,000 and the $1,000.
- On the accrual basis, December shows the $5,000 and the $1,000, the month the work was done.
Same business, same job. Only the timing changes.
Try it
Same job, two ways to read it
$0
December
$0
January
Which gives a truer picture?
For understanding how the business is doing, accrual usually does, because income and its costs land in the same month. That is why it is clearer which work pays when the books are read on the accrual basis, and why our gross profit guide reads the month that way.
Cash basis is simpler and shows when money actually moved. Many small businesses keep their books in a way that lets them see both.
Seeing both in QuickBooks Online
In QuickBooks Online, the profit and loss can be run on either basis: open the report, and change the accounting method between Cash and Accrual. If invoices and bills are entered when they happen, both views are available from the same books.
That only works if the books are kept that way. If invoices are never entered, and income is recorded only when deposits arrive, the accrual view has nothing to show.
When to think about switching
Signs that the accrual view would help you run the business:
- Customers pay on terms, so invoices sit unpaid for weeks.
- You buy materials or supplies now for work you bill later.
- Your monthly profit swings in ways that don’t match how busy you were.
- A lender or buyer asks for accrual-basis statements.
What about taxes?
Which method the business uses for its tax return is a separate decision, with its own rules, and it belongs to your CPA. The way you read your own reports month to month can be different from how the return is filed.
Frequently asked questions
For taxes, ask your CPA. For running the business, many owners find the accrual view more useful, with the cash view alongside it.
Because it matches income with the costs of earning it, so each month’s profit reflects the work done that month, not just when money happened to move.
For your own reports, when invoices and bills on terms start making the cash view misleading. For taxes, your CPA will tell you if and when a change makes sense.
Many small businesses file their taxes on the cash basis. Larger companies, and any business that needs audited statements, use accrual.
Often because one report is on the cash basis and the other on accrual. Check the basis before comparing numbers.
Start with a conversation
Our monthly clients receive their reports on an agreed schedule, and we walk through what they show. If you’d like that, request a free consultation. Prefer to call? 781-924-1489.