Burkland Brief:
- Accrual delivers a clearer picture of profitability and is what lenders and acquirers expect.
- Cash can work for very small, simple operations focused on day-to-day liquidity.
- Most established small businesses benefit from accrual.
Cash vs. Accrual Accounting in Plain English
Cash accounting is straightforward: you record revenue when money hits the bank, and expenses when you pay them. It’s simple, inexpensive, and gives you a quick read on your balance.
Accrual accounting records revenue when you earn it and expenses when you incur them, regardless of when cash moves. This produces a more accurate measure of profitability and shows what customers owe you, what you owe others, and which prepaid or deferred items still remain on the books.
The timing difference is best seen through a few examples:
- Example 1: Restaurant gift cards
A restaurant sells $10,000 in gift cards in December. Under cash accounting, the entire $10,000 shows as December revenue. Under accrual, it’s treated as deferred revenue and only recognized as customers redeem cards over the following months. - Example 2: Annual insurance premium
A business pays a $12,000 annual insurance premium upfront in January. Cash accounting shows a big expense spike that month. Accrual spreads the cost evenly at $1,000 per month, providing a smoother and more accurate picture of profitability. - Example 3: Contractor project with materials
A contractor begins a $60,000 remodeling project in March, buys $20,000 of materials, and bills the client in phases. Cash accounting only shows revenue when payments arrive and expenses when bills are paid, so margins look lumpy. Accrual matches materials and labor to the stage of work completed, showing realistic profit month by month.
Quick Comparison
| Factor | Cash Basis | Accrual Basis |
| When revenue is recognized | When payment is received | When work is performed or product delivered |
| When expenses are recognized | When cash is paid | When cost is incurred |
| Best for | Very small, simple operations | Growing businesses seeking clarity and financing |
| Main advantages | Simplicity, easy cash tracking | Accurate profit picture, lender and buyer ready |
| Main drawbacks | Can distort true profitability | Requires more setup and discipline |
When Cash Accounting Still Makes Sense
If you’re just starting out, have minimal invoices, and collect payment at the point of sale, cash accounting can keep costs down and books simple. A solo consultant who gets paid immediately may not need the complexity of accrual. Cash basis also makes liquidity obvious—what’s in the bank is what you have to work with.
Some small businesses use a hybrid approach: accrual for management reporting, but cash basis for tax filing if they qualify. For the 2025 tax year, the IRS allows most businesses to use cash accounting if their average annual gross receipts for the prior three years do not exceed $31 million, a threshold that is adjusted annually for inflation. This can provide the best of both worlds: financial clarity for running the company and potential tax benefits when filing returns. Your CPA can help determine if this approach makes sense for your business.
Why Most Small Businesses Move to Accrual Accounting
Owners who make the switch to accrual accounting often realize how much they were missing. Suddenly, they can see margins by month, track which invoices are overdue, and understand which costs are quietly eating into profit. That level of visibility improves decision-making as pricing, staffing, and investments become grounded in a clearer financial reality instead of guesswork.
As soon as your business starts sending invoices before cash arrives, carrying inventory, or managing multi-month projects, cash accounting loses usefulness. Results bounce around depending on payment timing, and it becomes harder to match costs to the revenue they supported.
There’s also a credibility factor. Banks, buyers, and investors all expect accrual financials because they show whether the business is truly profitable and sustainable. Cash books can mask problems like slow-paying customers, uneven expenses, or hidden liabilities which will surface quickly during due diligence. Accrual builds trust by presenting the business in the same format lenders and acquirers use to evaluate risk.
How to Make a Clean Switch to Accrual Accounting
Moving from cash to accrual doesn’t need to be overwhelming, but it does require a structured approach. The key is to pick a clean starting point, set up the right accounts, and build consistency into your monthly process. Here’s what that looks like:
1. Choose a conversion date
Most businesses close their cash books at month-end, then start accrual accounting fresh on the first day of the next month. That clean break makes reporting and comparisons easier.
2. Update your Chart of Accounts
Accrual requires more than just income and expenses. You’ll need accounts for receivables, payables, prepaids, deferred revenue, and possibly inventory or work-in-progress. This framework is what makes accrual financials accurate.
3. Capture opening balances
On day one of accrual, list out unpaid invoices, unpaid bills, customer deposits, prepaids, and inventory. Entering these balances ensures the new books reflect reality from the start.
4. Apply recognition rules
Under accrual, revenue is recorded when earned and costs when incurred. For many owners, this is the biggest mindset shift.
5. Tighten your monthly close
Accrual only delivers value if the books are closed consistently. Each month, reconcile bank and credit card accounts, update receivables and payables, spread prepaids, recognize deferred revenue, and review margins.
6. Layer in a cash forecast
Even with accrual books, you still need to know what’s in the bank. A 13-week cash forecast bridges the gap between accrual accuracy and day-to-day liquidity management.
While some small businesses handle the transition to accrual accounting in-house, most find it valuable to bring in professional support. Mapping prepaids, deferrals, and work-in-progress can be tricky, and mistakes early on can ripple through reports for months. A good accounting partner can make the switch seamless and ensure the new system pays off quickly.
The Bottom Line
Cash accounting works for the smallest businesses, but accrual is the standard once you’re serious about growth. It produces financial statements that reflect real performance, build trust with lenders and buyers, and support smarter decisions.
Burkland helps small business owners make the transition without headaches. We set up accrual books, manage monthly closes, and develop cash forecasts that keep liquidity in view. The result is financial clarity today and credibility for tomorrow. Contact us to request more information.