Cash vs accrual accounting: which should a small business use?
The difference between the cash and accrual methods in plain terms, an example of each, what the tax rules allow in the US and Canada, and how to choose.
6 min read · October 17, 2026
The difference
Cash basis records income when the money arrives and expenses when the money leaves. Accrual basis records income when you earn it, usually when you invoice, and expenses when you incur them, usually when the bill arrives, whether or not any money has moved yet.
Over a whole year the totals end up close. Month to month they can tell very different stories.
One month, two answers
In March a contractor finishes a $20,000 job and invoices it. The customer pays in April. In March the contractor also receives a $6,000 supplier bill for the materials, payable in May.
- Cash basis, March: no income and no expense. Profit: $0.
- Accrual basis, March: $20,000 income, $6,000 expense. Profit: $14,000.
The accrual figure tells you how the business performed in March. The cash figure tells you what happened in the bank. Both are true; they answer different questions.
What the tax rules say
United States
Most small businesses may choose either method. Businesses whose average annual gross receipts are under the IRS small-business threshold (around $31 million, adjusted for inflation each year) can generally use the cash method even if they carry inventory, with some conditions. Once you choose a method, changing it for tax purposes usually requires IRS approval with Form 3115. Ask your accountant which method your return uses.
Canada
The CRA generally requires the accrual method for business income. Farmers and fishers may use the cash method. Some self-employed commission salespeople have special rules. In practice, Canadian small businesses keep accrual books.
How to choose
- Choose accrual if you invoice customers and wait to be paid, buy on account, carry inventory, have staff, want a loan, or want to know whether the business is truly profitable. That covers most businesses.
- Cash basis can be enough for a very small business that is paid on the spot and pays its bills immediately, where cash and accrual are nearly the same anyway.
- You do not have to pick one view. Keep accrual books, and run the profit and loss on the cash basis when you want to see the cash picture. Good accounting software produces both from the same transactions.
See also: setting up a chart of accounts.
See both views of the same books
AcboBooks keeps your books on the accrual basis and can show the profit and loss on either basis, so you see real profit and cash in one program.
This article is general information, not tax, legal or accounting advice. Rules and dates change; check the official source or ask your accountant before acting.