Cash vs Accrual Accounting: Differences, Examples and Rules

Quick answer: Cash vs accrual accounting is a question of timing. The cash method records income when money arrives and expenses when you pay them. The accrual method records income when you earn it (usually when you invoice) and expenses when you incur them, even if no cash has moved. Cash is simpler; accrual shows true profitability.

Below we compare the two methods side by side, run the same two months of invoices and bills through both, and summarize the general rules on who can use which. Whichever method you choose, it starts with accurate invoices: our invoice generator gives every invoice a clear issue date and due date, which is exactly the information both methods depend on.

This is general information, not tax or accounting advice. Rules differ by country and change over time, so confirm your method with your tax authority or an accountant.

What is cash accounting?

Under cash-basis accounting you record a transaction only when money changes hands. A client pays your invoice on 10 April, so the income belongs to April, even if you did the work in March. You pay your supplier on 5 May, so that expense belongs to May.

The appeal is obvious: your books mirror your bank account, there is nothing to estimate, and for many self-employed people you pay income tax only on money you have actually received. The downside is that a busy month of invoicing can look like a bad month on paper if clients pay late.

What is accrual accounting?

Under accrual-basis accounting you record revenue when it is earned and expenses when they are incurred. Issuing an invoice for completed work creates revenue and an accounts receivable balance immediately. Receiving a supplier's bill creates an expense and an accounts payable balance, even before you pay it, the buyer-side document explained in invoice vs bill.

Accrual matches income with the costs of earning it in the same period, so it gives a more accurate view of profit. It is also the basis of most formal financial statements. The trade-off is more bookkeeping and the need to track receivables and payables carefully.

Cash vs accrual accounting: side-by-side comparison

Factor	Cash method	Accrual method
Income recorded	When payment is received	When earned, typically when invoiced
Expenses recorded	When paid	When incurred, typically when the bill is received
Tracks receivables and payables	Not in the main books	Yes
Complexity	Low	Moderate
Shows cash on hand	Closely	Not directly; needs a cash flow statement
Shows true profitability	Can be distorted by payment timing	Yes, income matched to related costs
Tax timing	Taxed on cash received	Can be taxed on invoiced income not yet collected
Typical users	Sole proprietors, freelancers, small service businesses	Larger companies, businesses with inventory, those reporting to lenders or investors

Worked example: the same two months, two methods

A small design studio has the following activity in March and April 2026:

• Invoice A: $5,000, issued in March, paid in March
• Invoice B: $7,000, issued in March, paid in April
• Rent: $3,000, billed and paid in March
• Printing supplies: $1,200, billed in March, paid in April

Line	Cash: March	Cash: April	Accrual: March	Accrual: April
Income	$5,000	$7,000	$12,000	$0
Expenses	$3,000	$1,200	$4,200	$0
Profit	$2,000	$5,800	$7,800	$0

Under cash accounting, March profit is $5,000 − $3,000 = $2,000 and April profit is $7,000 − $1,200 = $5,800. Under accrual accounting, all $12,000 of income and $4,200 of expenses belong to March because that is when the work was invoiced and the costs were incurred, so March profit is $7,800 and April is $0.

Over the two months, both methods arrive at the same total: $2,000 + $5,800 = $7,800. The method changes when profit is recognized, not how much profit there is overall. That timing still matters, though: it affects which tax year income falls into and how healthy any single month looks.

At the end of March, the accrual books also show $7,000 owed by clients (accounts receivable) and $1,200 owed to suppliers (accounts payable). The cash books show neither, which is why cash-basis businesses should still keep an unpaid-invoice list.

Pros and cons of each method

Cash method

• Pro: Simple to run, even from a bank statement and a folder of invoices.
• Pro: You generally aren't taxed on income you haven't received.
• Con: Profit swings with payment timing, which makes trends hard to read.
• Con: Can hide large unpaid receivables or unpaid bills.

Accrual method

• Pro: Matches income and costs, so margins are accurate month to month.
• Pro: Expected by banks, investors and buyers of a business.
• Con: More bookkeeping, often needing accounting software.
• Con: You may owe tax on invoices clients haven't paid yet.

Who can use the cash method?

Rules vary, and the summaries below are general:

• United States: Many small businesses can use the cash method. Corporations and partnerships with a corporate partner generally can only do so if their average annual gross receipts are at or below an inflation-adjusted threshold (around $30 million in recent years), and there are special rules for inventory and tax shelters. Check the current IRS figures and rules. US billers can use our USA invoice generator.
• United Kingdom: From the 2024 to 2025 tax year, the cash basis became the default for most self-employed individuals and partnerships, who can opt out to use accrual accounting. Limited companies generally prepare accrual-basis accounts. See also our guide to invoicing as a UK sole trader and the UK invoice generator.
• VAT and sales tax: Some tax regimes have their own cash accounting schemes that are separate from your income tax method. Don't assume the two are linked.

How to choose a method for your business

1. Check eligibility. Confirm which methods your business type and size allow.
2. Consider your payment terms. If clients routinely pay on Net 30 to Net 60 (see invoice payment terms), the gap between the methods grows.
3. Think about who reads your accounts. Lenders and investors usually want accrual figures.
4. Consider inventory. Holding stock often pushes businesses toward accrual.
5. Ask an accountant. Changing method later can be complicated, so get advice before your first tax return.

Whichever you pick, keep an eye on cash separately. Profitable accrual-basis businesses can still run short of money, which is why cash flow management deserves its own routine, and our bookkeeping basics guide shows how to record transactions under either method.

How deposits, credit notes and unpaid invoices are treated

Everyday invoicing situations show the difference between the methods clearly:

• Deposits received in advance. Under the cash method, a deposit is generally income when it is received. Under accrual, an advance payment for work not yet done is usually recorded as a liability (deferred or unearned revenue) and becomes revenue as the work is delivered.
• Credit notes. Under accrual, a credit note reduces revenue and accounts receivable in the period it is issued. Under the cash method, it only affects your books if it changes what the customer actually pays or results in a refund.
• Invoices that are never paid. Under the cash method, an unpaid invoice was never counted as income, so there is nothing to write off for income tax purposes. Under accrual, the revenue was already recorded, so a bad debt usually needs to be written off, and whether that is deductible depends on local rules.
• Prepaid expenses. Paying a 12-month software plan of $600 upfront is a $600 expense in the month paid under the cash method. Under accrual, it is typically spread at $50 per month over the year the service covers.
• Year-end timing. On the cash basis, a client paying on 2 January instead of 30 December moves that income into the next tax year. On the accrual basis, the invoice date decides the year.

These differences are why many freelancers start with the cash method and why businesses with deposits, subscriptions or long projects often find accrual reports more meaningful. Your accountant can confirm the right treatment for your situation.

Create dated, accurate invoices now

Both methods rely on invoices with correct dates and amounts. Use the free invoice generator to set a clear issue date, due date and total, then download a PDF using the Classic invoice template for a clean, accountant-friendly layout.