It’s one of the first real accounting decisions a company makes, and founders often get it wrong by defaulting to whatever their bank app shows. Let’s make it simple.
The one-sentence difference
Cash basis records money when it moves. Accrual basis records it when it’s earned or owed — regardless of when the cash actually changes hands.
That gap is small for a coffee shop and enormous for a SaaS company that bills annually and pays vendors monthly.
When cash basis is fine
- You’re very early, pre-revenue or close to it.
- You have almost no receivables or payables.
- You just need to know what’s in the bank.
Cash basis is easy and intuitive. The problem is that it can make a great month look terrible (you prepaid a year of hosting) or a terrible month look great (a big invoice landed but the work isn’t done).
When you need accrual
You should move to accrual once timing starts to distort the picture:
- You bill or collect in advance (deferred revenue).
- You carry meaningful receivables or payables.
- You’re raising money — investors expect accrual numbers.
- You’re approaching the IRS threshold that requires it.
If you want to know whether the business is actually profitable — not just whether the bank balance went up — you want accrual.
US GAAP usually makes the call
If you report under US GAAP (most VC-backed and US-operating companies eventually do), accrual isn’t a preference — it’s the standard. Cash-basis books won’t pass a serious diligence process.
Our default recommendation
Run accrual for truth, cash for cash: keep your official books on accrual so the numbers mean something, and watch a simple cash view alongside them so you never get surprised by runway. Modern tooling lets you see both from the same ledger.
Not sure which side of the line you’re on? Book a free call and we’ll tell you in ten minutes.