When it comes to tracking income and expenses, businesses can choose between two main accounting methods: accrual accounting and cash accounting.

“The difference between accrual and cash accounting lies in when revenue and expenses are recorded.”

Each method has its own rules and impact on how financial results are reported. Let’s break them down clearly.

In cash accounting, revenue is recorded only when money is received, and expenses are recorded only when they are actually paid. This method is straightforward and often used by small businesses or freelancers.

Example: You send an invoice in June but don’t receive payment until July. Under cash accounting, the income is recorded in July, not June.

In cash accounting, revenue is recorded only when the money is actually received, and expenses are recorded only when they are paid. This method is straightforward and commonly used by small businesses or freelancers because it directly reflects the movement of cash. For example, if you send an invoice to a client in June but receive the payment in July, the income is recorded in July, not June. While cash accounting is easy to manage and effectively tracks real cash flow, it doesn't show money owed to you or outstanding expenses, which means it might not give the full picture of your financial situation.

✅ Cash accounting is simple and tracks actual money in and out
✅ Accrual accounting gives a fuller picture of income and expenses
✅ Accrual is better for long-term planning and required for bigger businesses
✅ The method you choose affects how profits and performance are reported
✅ Always be consistent with the method you apply