Cash basis records income when money arrives and expenses when money leaves. Accrual records them when earned or incurred. Most small businesses should use cash.
Who can use cash basis
Almost any business with average gross receipts under about $31 million (the inflation-adjusted threshold), including businesses with inventory. It is the default for sole proprietors and most LLCs.
Why cash is right for most
- It matches your bank statement, which is what you are building books from.
- You are not taxed on invoices you have not collected.
- It is simpler, and simpler books get kept.
What about invoices and bills?
On cash basis they are memo items until paid. ProfitBooks records uploaded invoices and bills so you can see what is outstanding, and books the revenue or expense when the payment appears on the statement.
When accrual matters
Investors, lenders and acquirers want accrual statements. Businesses with large inventory or long projects get a truer picture on accrual. Your accountant can convert at year end from cash-basis books.