Cash vs. Accrual Accounting: What’s Right for Your Business?

As a small business owner, you wear a lot of hats—sales, service, marketing, and yes, finances. One of the first and most important decisions you'll face when it comes to bookkeeping is how to recognize income and expenses: using cash accounting or accrual accounting.

At Eddington Financial Solutions, we help business owners like you take the confusion out of bookkeeping. And one of the first questions we often answer is:

“Should I be using cash or accrual accounting?”

What Is Cash Accounting?

Cash accounting records income when you receive money and expenses when you pay them. Simple as that.

📌 Example:

• You send a $1,000 invoice on June 1.

• Your customer pays you on June 15.

• In cash accounting, that income is recorded on June 15—when the money hits your account.

Pros:

• Simple to use and understand

• Shows actual cash available at any moment

• Ideal for freelancers, solopreneurs, and service providers with low inventory

Cons:

• Doesn’t show money you’re owed or bills you need to pay

• Can give a misleading picture of long-term profitability

What Is Accrual Accounting?

Accrual accounting records income when it’s earned and expenses when they’re incurred, regardless of when money changes hands.

📌 Example:

• You send a $1,000 invoice on June 1.

• You record the income on June 1—even if your client pays later.

• If you receive a bill for software on June 10 but pay it in July, the expense is recorded in June.

Pros:

• Provides a more accurate picture of business performance

• Helps track receivables and payables

• Required by GAAP (Generally Accepted Accounting Principles) and for most businesses over $25 million in revenue

Cons:

• More complex to manage

• Doesn’t reflect real-time cash availability

• May require professional bookkeeping help

So… Which One Is Right for You?

Here’s a quick guide:

You may consider Cash Accounting if…

You’re a freelancer or solopreneur

You want to keep things simple

You mostly operate on a cash-in, cash-out basis

Your business is under $25M in annual revenue

You may consider Accrual Accounting if…

You manage inventory or have lots of receivables/payables

You need a full financial picture to make growth decisions

You want to apply for loans or attract investors

Your business is under $25M in annual revenue

You plan to scale or seek external funding

A Word on Taxes

When it comes to taxes, the IRS gives many small business owners the flexibility to choose cash or accrual accounting. But here’s the key: once you choose a method for tax reporting, you’re expected to stick with it.

✅ Choosing Your Method

• Sole proprietors, LLCs, and small corporations can usually choose the cash method, especially if they have less than $25 million in average annual gross receipts over the past 3 years.

• If you carry inventory or sell physical products, you might be required to use accrual or a hybrid method—depending on your situation.

Changing Methods

If you decide to switch from cash to accrual (or vice versa), you must get approval from the IRS by filing Form 3115 – Application for Change in Accounting Method. This isn’t something you can change on a whim—it needs to be documented and justified.

Why? Because switching methods can affect when income and expenses are reported, which could impact how much you owe in taxes.

How Eddington Financial Solutions Can Help

Choosing between cash and accrual accounting isn’t just a box to check—it’s a foundational decision that shapes how you view and manage your business.

The method you choose affects:

• How you track cash flow

• When you recognize revenue and expenses

• How you make budgeting and hiring decisions

• Your tax liability and filing process

At Eddington Financial Solutions, we go beyond basic bookkeeping. We take the time to learn how your business operates, what stage you're in, and where you're headed—so we can help you choose an accounting method that aligns with your goals, cash flow needs, and compliance requirements.

Whether you’re just getting started or you're feeling stuck with a system that no longer works, we’ll:

• ✅ Review your current setup for accuracy and efficiency

• ✅ Recommend the best-fit accounting method based on your operations

• ✅ Help implement or transition your books smoothly

• ✅ Provide ongoing support and insights so you can make confident financial decisions

We believe your books should work for you—not the other way around.

Eddington Financial Solutions
Your Trusted Partner in Bookkeeping