What is Cash vs. Accrual Accounting?
The two accounting methods, side by side - and why growing businesses move from cash to accrual.
Cash vs. Accrual Accounting: definition
The method you choose changes when income and expenses show up on your P&L. Cash basis is simple and mirrors your bank account, which is why many early-stage and very small businesses start there. Accrual basis is more work but far more accurate for any business that invoices customers, carries inventory, or wants investor-grade financials.
| Dimension | Cash basis | Accrual basis |
|---|---|---|
| Revenue recognized | When cash is received | When earned (goods/services delivered) |
| Expenses recognized | When cash is paid | When incurred |
| Tracks AR / AP | No | Yes |
| GAAP compliant | No | Yes |
| Best for | Very small, cash-in-cash-out businesses | Growth, inventory, fundraising, audit |
How Fintra handles it
Fintra keeps the ledger on an accrual basis so your books stay GAAP-ready as you grow, but because it stores both the earned date and the paid date on every invoice and bill, it can produce cash-basis views on demand - useful for tax planning or an owner who thinks in bank-balance terms. Switching how you read the numbers never means re-keying them.
Worked example
Frequently asked questions
Which method should a small business use?
If you are cash-in, cash-out with no inventory and no outside investors, cash basis is fine and simpler. The moment you invoice on terms, carry inventory, raise money, or want a lender or acquirer to trust your numbers, move to accrual. Because Fintra holds both dates, you are not locked in.
Can I switch from cash to accrual later?
Yes, though it requires a set of conversion entries to record the AR, AP, and deferrals that cash basis ignored. A platform that already stores invoice and payment dates makes the switch far less painful than reconstructing history from a spreadsheet.
Does the IRS care which method I use?
It can. The IRS requires accrual for many larger businesses and for those that carry inventory, but permits cash basis for many small businesses. This is a tax question worth confirming with your accountant; Fintra supports reporting on either basis.
Is one method more accurate?
Accrual is more accurate for measuring performance because it matches revenue to the costs that produced it in the same period. Cash basis is more accurate as a picture of liquidity - literally what is in the bank. Good finance teams look at both, which is why Fintra surfaces both.
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