Financial Glossary
Cash Basis vs. Accrual Basis Accounting
Cash basis and accrual basis are the two primary methods for recording revenue and expenses. Cash basis records income when money is received and expenses when they are paid, while accrual basis records revenue when it is earned and expenses when they are incurred, regardless of cash timing. Accrual basis follows GAAP and matches revenue to the period that generated it, while cash basis is simpler and tracks the bank account more directly.
Problem & Application
Many owner-operated businesses start on cash basis because it is intuitive and aligns with tax filings, but accrual basis gives a truer picture of profitability once deferred revenue, prepaid bookings, or unpaid bills are material. STR and campground operators that collect deposits months before a stay often find accrual basis essential to avoid overstating a strong booking month and understating the slow months that follow. Lenders, investors, and buyers typically expect accrual financials, and switching methods has tax implications worth planning for.
In Short
Cash basis wins on simplicity, while accrual basis wins on accuracy and is what most outside parties expect. The right method depends on the business's size, complexity, and who will rely on the financials.