Cash accounting records income when money hits your bank account and expenses when you pay them. Accrual accounting records income when you earn it and expenses when you incur them, regardless of when cash actually moves.

Here’s a simple example. You finish a project on January 28 and send the invoice that day. The customer pays you on February 15. Under cash accounting, that’s February income because that’s when you received the money. Under accrual accounting, it’s January income because that’s when you completed the work and billed for it.

The same logic applies to expenses. You receive a materials bill in March but don’t pay it until April. Cash accounting shows it as an April expense. Accrual shows it in March when you received the bill and created the obligation.

This timing difference can make your monthly financial picture look very different. A month where you sent out $30,000 in invoices but only collected $8,000 from previous work looks completely different under each method. Cash shows $8,000 in revenue. Accrual shows $30,000. Neither is wrong. They’re just measuring different things.

Most small businesses use cash accounting because it’s simpler and aligns with what you see in your bank account. When your balance goes up from a customer payment, your books show income. When it goes down for a business purchase, your books show an expense. There’s an intuitive connection between your bank statement and your profit and loss report.

The IRS allows businesses to choose cash accounting if average annual gross receipts are under $25 million over the prior three years. That covers nearly every small business in Northwest Arkansas. Some businesses with inventory historically had to use accrual, but tax law changes have relaxed those requirements for smaller companies.

Accrual accounting gives a more accurate picture of long-term profitability because it matches revenue with the period when you actually performed the work. If you bill a big project in December but don’t collect until January, accrual shows the revenue in the year you did the work. This matters for understanding true performance, but it also means you might owe taxes on income you haven’t received yet.

The method you choose affects tax planning flexibility. Cash basis lets you control timing to some degree. Need to reduce taxable income this year? Delay sending invoices until January or prepay certain expenses in December. Accrual doesn’t offer that same flexibility because transactions record based on when they occur, not when money moves.

For monthly bookkeeping, consistency matters more than which method you pick. Switching methods mid-year creates confusion, and changing methods from year to year requires IRS approval. Pick one that fits your business and stick with it.

If you’re not sure which method you’re currently using or which makes more sense for your situation, a bookkeeper near Bentonville can review your setup and explain the practical implications for your specific business. The right choice depends on your industry, your billing cycles, and how you want to approach tax planning.