My perspective as a seasoned CFO aligns with widely accepted financial principles: accrual accounting is the most accurate method for reflecting a company’s true financial health. As highlighted below, accrual accounting recognizes revenues and expenses when they occur—not merely when cash is exchanged—providing a clear, real-time, and holistic view of operating performance and financial position. It is estimated that 70–72% of small and medium-sized businesses (SMBs) still use cash-based accounting.
Why?
Many assume it’s due to a lack of knowledge, but the reality is that accrual accounting requires more advanced skill sets and typically costs more to maintain. Cash accounting may seem easier, but it significantly limits transparency, clarity, and effective financial management. I’ll say this emphatically: do not rely on cash accounting for operational visibility. It will cost you.
Cash accounting works only under very limited conditions—specifically when all receivables and payables are settled immediately, in cash or check, within the same month, without credit cards, credit terms, or deferred payments. This scenario is increasingly rare in modern business environments where credit, net terms, and delayed payments are standard.
It is also essential to distinguish operational accounting methods from tax reporting methods. Businesses should maintain daily accounting records on an accrual basis to understand their true financial performance. However, tax authorities may allow or require cash-basis reporting for tax filings, which can offer timing advantages. Both approaches have pros and cons: accrual accounting ensures accuracy and compliance, while cash-basis reporting may simplify tax filings and optimize timing in certain situations.
This balanced approach—managing operations with accrual accounting while leveraging cash-basis tax benefits where permitted—represents a strategic and practical application of accounting principles.
The Core Difference Between Cash and Accrual Accounting
The fundamental difference between cash and accrual accounting lies in when revenues and expenses are recorded.
- Cash accounting records transactions only when money changes hands—revenue when cash is received, expenses when payments are made.
- Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of cash timing.
This means accrual accounting provides a more accurate and timely picture of a company’s financial position.
Cash Accounting
Cash accounting tracks the inflow and outflow of cash, offering simplicity and a real-time view of available cash. For example, if a company sells $10,000 in September but receives payment in October, the revenue is recorded in October under the cash method. While this method may suit very small businesses or those highly focused on cash flow, it is ultimately limiting. With cash accounting, you cannot fully understand performance trends, and poor visibility creates avoidable cash-flow challenges.
Accrual Accounting
Accrual accounting provides a complete financial picture by recognizing transactions as they occur. Using the same example, a $10,000 sale in September is recorded in September, with an increase in accounts receivable. This method is standard for growing businesses, companies with credit terms, or any organization that needs accurate performance tracking independent of payment timing.
This approach makes it far easier to manage operations, forecast outcomes, plan for growth, and maintain compliance with financial reporting standards.
Visual Example Comparison
| Event | Cash Accounting | Accrual Accounting |
| Sale of goods on Sept 15 | Revenue recorded on Oct 15 | Revenue recorded on Sept 15 |
| Payment received on Oct 15 | Cash increases on Oct 15 | Cash increases on Oct 15 |
| Records on Sept financials | No revenue recorded | Revenue recorded as earned |
| Records on Oct financials | Revenue recorded on receipt | No new revenue recorded |
| Records on Nov financials | No changes recorded | No changes recorded |
| Purchase of goods on Sept 15 | Expense recorded on Sept 15 | Expense recorded on Sept 15 |
| Payment made on | Cash decreases on Sept 15 | Cash decreases on Nov 15 |
| Records on Sept financials | Purchase recorded on bank | Purchase recorded as Payable |
| Records on Oct financials | No changes recorded | No changes recorded |
| Records on Nov financials | No changes recorded | No changes recorded |
Why Accrual Accounting Supports Business Growth
What companies need most is consistency—and that is exactly what accrual accounting provides by matching revenues and expenses in the periods they relate to. Cash accounting, on the other hand, recognizes transactions only when cash moves, making it difficult to measure ongoing performance, profitability, and trends.
Unlike cash accounting, accrual accounting delivers a reliable and comparable view of financial health, making it essential for informed decision-making and sustainable business growth.
