What the Heck is Cash vs. Accrual Accounting? (And Which One Are You?)

Let’s be real: unless you’re a bookkeeper, “cash vs. accrual accounting” sounds like one of those dry finance terms your eyes glaze over reading.

But here’s the thing — it actually matters. A lot.

Whether you're running a boutique PR firm in LoDo or a mobile dog grooming business in Littleton, the method you choose affects how (and when) you report income, pay taxes, and understand your business's health. So let's break it down without the jargon.

So… What Is Cash Basis Accounting?

Cash basis is the simpler of the two. You recognize income when the money hits your account, and expenses when you actually pay them.

📦 Example: You send a $2,000 invoice in June, and your client pays you in July. Under cash basis, you recognize that $2,000 as July income.

Pros:

• Super straightforward

• Easier to track actual cash in the bank

• Often better for sole proprietors or very small service businesses

Cons:

• Doesn’t give a full picture of what you earned or owe

• Can make your books look weird if there’s a delay in payments

What About Accrual Accounting?

Accrual accounting recognizes income when it’s earned (even if the cash hasn't arrived yet), and expenses when they’re incurred, not when you pay them.

📦 Example: Same $2,000 invoice in June? Under accrual, that’s counted as June revenue — even if your client ghosts you until July.

Pros:

• Gives a more accurate financial picture

• Helps with forecasting, especially if you have lots of invoices or bills

• Required by the IRS once you hit a certain revenue threshold (usually $25M — but don’t worry, we’ll let you know when you’re ballin’ like that)

Cons:

• More complex (read: please have a bookkeeper)

• Can feel disconnected from your actual cash flow

So… Which One Are You?

Most small businesses in Colorado — especially solopreneurs and service-based businesses — start with cash basis accounting. It’s easier, it syncs with your bank account, and it keeps you sane.

BUT: If you're growing, carrying accounts receivable, or trying to get financing, accrual might be the better move. Why? Because it shows your true revenue and costs more accurately — which banks, investors, and savvy business owners like to see.

Quick Test: Which Method Are You Using?

Ask yourself:

• Do I count money when it lands in my account? → You're probably using cash basis

• Do I recognize income and expenses before the money moves? → That's accrual

Still unsure? That’s where we come in.

Why This Matters for Tax Time (and Your Sanity)

Choosing the right method affects how you file taxes, what your financials show, and whether you get hit with unexpected tax bills. And once you pick a method (and file taxes with it), changing it requires IRS permission. So yeah... it's a bigger deal than it seems.

Bonus for Denver Business Owners: Colorado doesn’t require a specific method, but choosing the right one can help you prep for growth — or just finally understand why your bank balance and your “net income” are giving you mixed signals.

TL;DR: Cash = Simple. Accrual = Accurate. Pick What Fits You.

Choosing between cash and accrual isn't about being "right" — it's about being aligned with how you operate.

If you:

• Get paid right away and don’t invoice much → cash basis might be perfect.

• Send lots of invoices and manage delayed expenses → accrual is probably smarter.

Still scratching your head? Don’t stress.

At Clearbookz, we help small businesses across Denver and Colorado get their accounting method dialed in — and explain it like humans, not spreadsheets.

📍Need help figuring out your accounting method (or switching it)? Let’s talk. We’re your local, no-BS, slightly sarcastic bookkeeping team — and we’ve got you.