The core difference

Cash basis records revenue when money arrives and expenses when money leaves. Accrual basis records revenue when it's earned and expenses when they're incurred, regardless of when cash moves. That timing difference changes everything downstream.

When cash basis makes sense

Very small or service businesses with little inventory and short payment cycles.
Simplicity matters — cash basis is easy to maintain and intuitive: your books look like your bank account.
Tax timing — you can sometimes defer income by delaying invoicing near year-end (within the rules).

The catch: cash basis can badly misrepresent reality. A great December where you did $80K of work but invoiced in January looks like a terrible month.

When accrual is required or better

You carry inventory — the IRS generally requires accrual once inventory is material.
Revenue over the threshold — businesses above the IRS gross-receipts limit (indexed annually) must use accrual.
You want to raise money or sell — investors, lenders, and acquirers expect accrual financials; cash-basis books won't pass diligence.
You need to see true profitability — matching revenue to the costs that generated it is the only way to know if a project actually made money.

A practical hybrid

Many SMBs operate on accrual for management reporting (to see real profitability and match revenue to cost) while their tax return is prepared on cash basis (for favorable timing), where allowed. Good accounting software keeps both views from a single ledger.

Bottom line

If you're tiny and cash-only, start on cash basis. The moment you carry inventory, extend meaningful credit terms, or think about outside capital, move to accrual. Switching later is possible but requires an IRS change-of-accounting-method filing — easier to plan for than to scramble through.

Accrual vs. Cash Accounting: Which Should You Use?

The core difference

When cash basis makes sense

When accrual is required or better

A practical hybrid

Bottom line

See Hosting Books in action

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