Which is better: cash basis or accrual basis?

The real question is which is most appropriate to your business!  Both have value in the right situation.

Cash basis accounting is best used for personal finance and microbusinesses.  This is the method that chronicles transactions as they occur.  No invoices are recorded until they are paid, no bills are documented until the money is spent.  If no money moves, the transaction is not documented.  It is the best tool for these situations.  If the only question you want to ask is, do I have the money to pay for this right now?” or “Are you paying for this right now?” then this is the method for you.  

What this means is that when you report your income for taxation purposes, the IRS will want your cash accounting for the date it occurred.  In other words, if you sell a monthly service from June to June and your customer pays upfront for the whole year – the revenue for that sale would only be reported for the first year, not the second… because that is when you received the cash.  The same goes for each expense transaction

Simple and straightforward, no muss, no fuss.  

Accrual basis accounting will match revenue with expenses; and is generally required when your business has inventory.  Once you reach a certain level of complexity, this becomes a requirement by the IRS.  In general, if you have inventory or use accruals to report income or your expenses, you should be using the accrual method. 

Not simple, or straightforward, but quite useful in the data it generates on your business.  By knowing a more three-dimensional view of your business, you have more clarity to make the decisions that won’t have hidden consequences or unforeseen fall-out.  


IRS Publication 538 (01/2019), Accounting Periods and Methods, rev. 01/2019.  Retrieved from: Publication 538 (01/2019), Accounting Periods and Methods | Internal Revenue Service (irs.gov) 

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