Accrual Accounting vs. Cash Basis Accounting: What’s the Difference?

Chizoba Morah is a business owner, accountant, and recruiter, with 10+ years of experience in bookkeeping and tax preparation.

Michael Rosenston is a fact-checker and researcher with expertise in business, finance, and insurance.

1. Accounting Explained With Brief History and Modern Job Requirements
2. Accounting Equation
3. Asset
4. Liability
5. Equity
6. Revenue
7. Expense
8. Current and Noncurrent Assets

Accounting Theories and Concepts

1. Accounting Theory
2. Accounting Principles
3. Accounting Standard
4. Accounting Convention
5. Accounting Policies
6. Principles-Based vs. Rules-Based Accounting

Accounting Methods: Accrual vs. Cash

1. Accounting Method
2. Accrual Accounting
3. Cash Accounting
4. Accrual Accounting vs. Cash Basis Accounting

Accounting Oversight and Regulations

1. Financial Accounting Standards Board (FASB)
2. Generally Accepted Accounting Principles (GAAP)
3. International Financial Reporting Standards (IFRS)
4. IFRS vs. GAAP
5. US Accounting vs. International Accounting

1. Understanding the Cash Flow Statement
2. Breaking Down The Balance Sheet
3. Understanding the Income Statement

1. Accountant
2. Financial Accounting
3. Financial Accounting and Decision-Making
4. Corporate Finance
5. Financial vs. Managerial Accounting
6. Cost Accounting

Public Accounting: Financial Audit and Taxation

1. Certified Public Accountant (CPA)
2. Chartered Accountant (CA)
3. Accountant vs. Financial Planner
4. Auditor
5. Audit
6. Tax Accounting
7. Forensic Accounting

Accounting Systems and Record Keeping

1. Chart of Accounts (COA)
2. Journal
3. Double Entry
4. Debit
5. Credit
6. Closing Entry
7. Invoice
8. Introduction to Accounting Information Systems

Accounting for Inventory

1. Inventory Accounting
2. Last In, First Out (LIFO)
3. First In, First Out (FIFO)
4. Average Cost Method

Accrual Accounting vs. Cash Basis Accounting: An Overview

The main difference between accrual and cash basis accounting lies in the timing of when revenue and expenses are recognized. The cash method provides an immediate recognition of revenue and expenses, while the accrual method focuses on anticipated revenue and expenses.

Key Takeaways

• Accrual accounting records revenue and expenses when transactions occur but before money is received or dispensed.
• Cash basis accounting records revenue and expenses when cash related to those transactions is actually received or dispensed.
• Accrual accounting provides a more accurate view of a company’s health by including accounts payable and accounts receivable.
• The accrual method is the more commonly used method by large companies, especially by publicly traded companies, as it smooths out earnings over time.
• The cash basis method is generally used by sole proprietors and smaller businesses.

Accrual Accounting

Under accrual accounting, revenue is accounted for when it is earned. Unlike the cash method, the accrual method records revenue when a product or service is delivered to a customer with the expectation that money will be paid in the future. In other words, money is accounted for before it’s received. Likewise, expenses for goods and services are recorded before any cash is paid out for them.

Cash Basis Accounting

Under cash basis accounting, revenue is reported on the income statement only when cash is received. Expenses are recorded only when cash is paid out. The cash method is typically used by small businesses and for personal finances.

Key Differences

Accrual Method

The accrual method records accounts receivables and payables and, as a result, can provide a more accurate picture of the profitability of a company, particularly in the long term.

For example, a company might have sales in the current quarter that wouldn’t be recorded under the cash method. The related revenue is expected in the following quarter. An investor might think the company is unprofitable when, in reality, the company is doing well.

The accrual method doesn’t track cash flow. A company might look profitable in the long term but actually have a challenging, major cash shortage in the short term.

Another disadvantage of the accrual method is that it can be more complicated to use since it’s necessary to account for items like unearned revenue and prepaid expenses. It also may require added staff.

The accrual method is generally required for companies that file audited financial statements and is required under the generally accepted accounting principles (GAAP) issued by the Financial Accounting Standards Boards (FASB).

Cash Basis Method

The key advantage of the cash method is its simplicity—it only accounts for cash paid or received. Tracking the cash flow of a company is also easier.

It’s beneficial to sole proprietorships and small businesses because, most likely, it won’t require added staff (and related expenses) to use.

However, the cash basis method might overstate the health of a company that is cash-rich. That’s because it doesn’t record accounts payables that might exceed the cash on the books and the company’s current revenue stream.

As a result, an investor might conclude that the company is making a profit when, in reality, the company might be facing financial difficulties.

Tax Law Change

The Tax Cuts and Jobs Act increased the number of small business taxpayers entitled to use the cash basis accounting method. For 2024, small business taxpayers with average annual gross receipts of $30 million or less in the prior three-year period can use it.

Special Considerations

The accrual method is the more commonly used method, particularly by publicly traded companies. One reason for the accrual method’s popularity is that it smooths out earnings over time since it accounts for all revenues and expenses as they’re generated.

The cash basis method records these only when cash changes hands and can present more frequently changing views of profitability.

For example, under the cash basis method, retailers would look extremely profitable in Q4 as consumers buy for the holiday season. However, they would look unprofitable in the next year’s Q1 as consumer spending declines following the holiday rush.

Both methods have their advantages and disadvantages. Each provides different views of the financial health of a company. For investors, it’s important to understand the impact of both methods when making investment decisions.

The vast majority of companies that people would potentially invest in will be using accrual-based accounting. However, should you come across a small company using cash-based accounting, it’s definitely something to watch out for.

Accrual Accounting vs. Cash Basis Accounting: Example

Let’s say you own a business that sells machinery. If you sell $5,000 worth of machinery, under the cash method, that amount is not recorded in the books until the customer hands you the money or you receive the check.

Under the accrual method, the $5,000 is recorded as revenue as of the day the sale was made, though you may receive the money a few days, weeks, or even months later.

The same principle applies to expenses. If the company receives an electric bill for $1,700, under the cash method, the amount is not recorded until the company actually pays the bill. However, under the accrual method, the $1,700 is recorded as an expense the day the company receives the bill.

What Is Accrual Accounting?

Accrual accounting is an accounting method that records revenues and expenses before payments are received or issued. In other words, it records revenue when a sales transaction occurs. It records expenses when a transaction for the purchase of goods or services occurs.

What Is the Difference Between Cash Basis and Accrual Accounting?

Cash basis accounting records revenue and expenses when actual payments are received or disbursed. It doesn’t account for either when the transactions that create them occur. On the other hand, accrual accounting records revenue and expenses when those transactions occur and before any money is received or paid out.

Companies might also use modified accrual accounting and modified cash basis accounting.

When Does a Company Account for Revenue If It Uses Cash Basis Accounting?

Under the cash basis accounting method, a company accounts for revenue only when it receives payment for the products or services it provides a customer.

The Bottom Line

Accrual accounting and cash basis accounting are two ways to record financial transactions. They differ in when a transaction is recorded: accrual accounting when money is earned or an expense is incurred, and cash basis accounting when money is received or an expense is paid. Accrual accounting is required by law; however, there are exceptions where cash basis accounting can be used.

1. Internal Revenue Service. “Rev. Proc. 2023-34,” Pages 16–17.
2. Internal Revenue Service. “Tax Cuts and Jobs Act: A Comparison for Businesses.”

1. Accounting Explained With Brief History and Modern Job Requirements
2. Accounting Equation
3. Asset
4. Liability
5. Equity
6. Revenue
7. Expense
8. Current and Noncurrent Assets

Accounting Theories and Concepts

1. Accounting Theory
2. Accounting Principles
3. Accounting Standard
4. Accounting Convention
5. Accounting Policies
6. Principles-Based vs. Rules-Based Accounting

Accounting Methods: Accrual vs. Cash

1. Accounting Method
2. Accrual Accounting
3. Cash Accounting
4. Accrual Accounting vs. Cash Basis Accounting

Accounting Oversight and Regulations

1. Financial Accounting Standards Board (FASB)
2. Generally Accepted Accounting Principles (GAAP)
3. International Financial Reporting Standards (IFRS)
4. IFRS vs. GAAP
5. US Accounting vs. International Accounting

1. Understanding the Cash Flow Statement
2. Breaking Down The Balance Sheet
3. Understanding the Income Statement

1. Accountant
2. Financial Accounting
3. Financial Accounting and Decision-Making
4. Corporate Finance
5. Financial vs. Managerial Accounting
6. Cost Accounting

Public Accounting: Financial Audit and Taxation

1. Certified Public Accountant (CPA)
2. Chartered Accountant (CA)
3. Accountant vs. Financial Planner
4. Auditor
5. Audit
6. Tax Accounting
7. Forensic Accounting

Accounting Systems and Record Keeping

1. Chart of Accounts (COA)
2. Journal
3. Double Entry
4. Debit
5. Credit
6. Closing Entry
7. Invoice
8. Introduction to Accounting Information Systems

Accounting for Inventory

1. Inventory Accounting
2. Last In, First Out (LIFO)
3. First In, First Out (FIFO)
4. Average Cost Method

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

Double entry is an accounting term stating that every financial transaction has equal and opposite effects in at least two different accounts.

Cash management is the process of managing cash inflows and outflows. Cash monitoring is needed by both individuals and businesses for financial stability.

Hedge accounting is a method of accounting in which entries to adjust the fair value of a security and its opposing hedge are treated as one.

Financial accounting is the process of recording, summarizing, and reporting the myriad of a company’s transactions to provide an accurate picture of its financial position.

A current account surplus is a positive current account balance, indicating that a nation is a net lender to the rest of the world.

Suspense accounts are used by businesses, mortgage servicers, and brokerage firms to temporarily account for customers' money, pending further action.

• About Us
• Terms of Service
• Dictionary
• Editorial Policy
• Advertise
• News
• Privacy Policy
• Contact Us
• Careers
• EU Privacy

We Care About Your Privacy

We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.

We and our partners process data to provide:

Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)