Cash vs. Accrual Accounting: Which Method Should Your Business Use?

When you set up your books, you'll choose an accounting method: cash or accrual. It determines when income and expenses are recorded, and it affects both your financial reports and your taxes.

Cash basis accounting

With the cash method, you record:

• Income when you receive the money
• Expenses when you pay them

Example: You finish a job in December and send an invoice, but the customer pays in January. Under the cash method, that income belongs to January, and to next year's taxes.

Pros:

• Simple and intuitive
• Matches your bank account
• Can offer timing flexibility for taxes

Cons:

• Can give a misleading picture of profitability, especially if customers pay slowly
• Doesn't show what you owe or are owed

Accrual basis accounting

With the accrual method, you record:

• Income when you earn it (usually when you invoice or complete the work)
• Expenses when you incur them (when you receive the bill), regardless of when cash moves

Example: Same December job: the income is recorded in December, even though payment arrives in January.

Pros:

• More accurate picture of performance month to month
• Shows accounts receivable and payable
• Required for larger businesses and often preferred by lenders

Cons:

• More complex
• You can owe tax on income you haven't collected yet

Which can a small business use for taxes?

Most small businesses can use the cash method for tax purposes, as long as average annual gross receipts are below a threshold that's adjusted for inflation each year (currently in the tens of millions of dollars). Businesses with inventory may also be able to use simplified methods.

Can you use both?

Yes, in practice. Many small businesses keep books on an accrual basis for management decisions and file taxes on a cash basis, or vice versa. Modern accounting software can run reports either way. Your tax method must be consistent, and changing it generally requires IRS approval.

A note on Washington taxes

Washington has its own rules about whether you report B&O and sales tax on a cash or accrual basis, generally tied to how you keep your books. Confirm the right method with the Department of Revenue or your bookkeeper, and make sure your excise tax reporting stays consistent with your books.

Which should you choose?

Cash basis is usually fine if:

• You're a service business with quick payments
• You don't carry inventory
• You want simplicity

Consider accrual if:

• You invoice large amounts with payment terms
• You carry inventory or have significant bills you pay later
• You want accurate monthly profit numbers or plan to seek financing

The bottom line

Most new small businesses start on the cash method. As you grow, accrual reporting gives a clearer picture. Decide with your bookkeeper, set up your software correctly, and stay consistent.

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Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.