Cash vs. Accrual Accounting: What’s the Difference and Why It Matters

When reviewing financial reports, one detail can significantly change how you interpret the numbers: whether the report is prepared on a cash basis or an accrual basis.
Both are legitimate methods of accounting, but they paint very different pictures of financial activity.

Let’s walk through the difference with real world examples that make it easy to understand.

Cash Basis Accounting – Follows the Money
Cash basis accounting records income when money is received, and expenses when money is paid out.
It’s simple, clean, and closely tied to your bank account.

In practice:
If no money changed hands, nothing gets recorded.

Example:
Let’s say a tenant stays in your rental property in June but doesn’t pay until July 3rd.
Under the cash basis, the income is recorded in July, because that’s when the funds were actually received.

Best For:

• Tracking real-time cash flow
• Small businesses or property owners who prioritize liquidity

Accrual Basis Accounting – Follows the Activity
Accrual accounting, on the other hand, records income when it’s earned and expenses when they’re incurred, regardless of when money moves.

In practice:
If the work was done or the rent was billed, it’s recorded—even if the cash hasn’t moved yet.

Example:
You receive a $1,200 invoice for repairs completed on March 29th, but you don’t pay it until April 10th.
Under accrual accounting, the expense is recorded in March, because that’s when the service took place.

Best For:

• Understanding the full financial picture
• Businesses with more complex operations

Why It Matters
Here’s how the same situation can look under each method:

Scenario Cash Basis Accrual Basis
Rent paid late Not shown until payment is received Shown when billed
Invoices not yet paid Not recorded Already listed as an expense
Big expense billed but unpaid Doesn’t appear Appears in the month it was incurred
Prepaid rent Counted when paid Deferred to the month it applies

Knowing which method is being used helps you make sense of your reports—especially when timing matters.

Cash basis gives you a snapshot of your cash on hand.

Accrual basis gives you a more accurate view of overall financial performance.

Both methods are valuable in different contexts. The key is to know which one is being used—so you can read your numbers clearly and make smart, informed decisions.