Cash or accrual — the choice decides what your numbers mean

Two businesses can have identical bank statements and completely different profits. Which one is right depends on a choice made in the accounting basis.

The difference in one example#

You do $10,000 of work in March. You invoice on 31 March. The client pays on 20 April.

Under cash accounting, March shows nothing and April shows $10,000. Under accrual, March shows $10,000 of revenue and a receivable; April shows only the receivable turning into cash.

Now suppose you also paid a $3,000 subcontractor in March for that same work. Cash accounting reports a $3,000 loss in March and a $10,000 profit in April. Accrual reports a $7,000 profit in March and nothing in April.

Only one of those describes what actually happened, and it is not the one that follows the bank.

Why the mismatch matters#

The problem with cash accounting is not that it is inaccurate over a lifetime — over a long enough period the two converge. It is that it puts revenue and its costs in different periods, so every individual period is wrong in a way that cancels out only in hindsight.

That makes it almost useless for the things a business actually uses accounts for: knowing whether a month was good, whether a project made money, whether a price is high enough.

It is also actively misleading in growth. A business collecting faster than it pays looks more profitable than it is; one investing ahead of revenue looks like it is failing.

The mechanisms accrual adds#

Accrual accounting needs four constructs that cash accounting has no use for:

Receivables — revenue earned but not collected. Payables — costs incurred but not paid. Prepayments — money paid for something not yet consumed, like an annual insurance premium, spread across the periods it covers. Accruals — costs consumed but not yet invoiced, like a month of electricity before the bill arrives.

The last one is where judgement enters. Recognising a cost you have not been billed for means estimating it, and estimates are where accounting stops being mechanical.

Account	Debit	Credit
6300 · Professional Fees	2,500.00
2150 · Accrued Liabilities		2,500.00
Total	2,500.00	2,500.00

Which one you are allowed to use#

This is where the choice narrows, and it is worth separating two questions that get conflated.

For your books, accrual is the basis that produces meaningful statements, and it is what most accounting standards require for financial reporting.

For tax, jurisdictions differ, and the rules are their own. Some permit cash or modified-cash reporting for smaller businesses or specific sectors — farming and fishing are common examples in Canada. Some require accrual outright above a size threshold.

The two do not have to match, and often do not: keeping accrual books and making adjustments for a tax return is entirely normal. What does not work is keeping cash books and hoping to produce accrual statements later, because the information you would need — when work was actually done, when a cost was actually incurred — was never captured.

The modified middle#

Plenty of small businesses run something in between: broadly cash during the year, with accruals posted at period end for the things that would distort the picture — unbilled revenue, unpaid supplier costs, prepaid annual expenses.

That is a legitimate and pragmatic position, provided the adjustments are actually made and made consistently. The failure mode is doing it once at year-end for the accountant and never during the year, which means every management report you looked at for eleven months was on a different basis to the one you filed.

What this asks of the bookkeeping#

Accrual accounting is not more work per transaction. It is more work at the boundaries — the period ends, where you have to decide what belongs in which month. That decision is exactly what the close sequence exists to make routine.

It also depends on invoices and bills being recorded when they are issued and received, not when they are paid. That is the actual behavioural change, and it is the one that makes everything downstream possible.