Defining cash accounting
The cash method of accounting tracks the actual money flowing in and out of a business. “It’s the easier method because it shows what your company earns and pays out in a calendar year,” says Delorenzo.  That makes it more attractive for a start-up or small business, she says.

In order to explain the cash method, Delorenzo offers this example: say your company sent an invoice for services rendered to a client on December 15, 2013, which was paid on January 15, 2014. Under the cash method of accounting, the payment would be noted on the company’s 2015 taxes since the income was actually received in 2014.

Defining the accrual method
Under the accrual method of accounting, a company’s bottom line is calculated differently from the cash method.  A business’s taxable income is based on “revenues as they’re earned and expenses as they are incurred,” says Delorenzo. 

Using the same example as above, if a client is invoiced on December 15, 2013 and payment is received January 15, 2014, the business needs to report the income on its 2014 taxes since the funds were earned in 2013. The date of payment is not relevant.

Deciding what’s best for you and your company
Because the cash method is simpler to manage, it tends to be more attractive to smaller entities. Despite being more complicated to track, the accrual method is a better fit for businesses “with a lot of invoices, both in accounts receivables and accounts payables. If a firm has more payables, it’s worth it [the accrual method] because you get tax deductions sooner,” says Delorenzo. 

Since the accrual method is more complicated, it’s wise to consult with an accountant or bookkeeper to determine which choice is best for you and your business.

Moreover, Delorenzo notes a company can’t just switch to the accrual method of accounting if it has been filing taxes using the cash method. The IRS must approve of the change, she says.

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Tami Kamin Meyer is an Ohio attorney and writer. Her email address is This email address is being protected from spambots. You need JavaScript enabled to view it.. 

























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