The difference in one line
Cash basis records transactions when money moves. Accrual records them when they are earned or incurred. The gap between the two is where most misunderstanding of business performance lives.
Why accrual shows reality
A business that invoices 80,000 in a month and collects 40,000 had an 80,000 month. Cash basis says 40,000 and will say the rest next month, so neither month is accurate. Over a year the totals converge; within any month they do not.
When you are required to use accrual
Thresholds based on receipts, holding inventory, and certain entity structures can all require accrual for tax purposes. Many businesses also find lenders and investors expect accrual statements regardless of the tax basis.
Running both
Keeping accrual books for management and converting for tax filing is common and reasonable. The reverse, keeping cash books and trying to produce accrual statements at year end, is where errors accumulate.
Switching
A change in accounting method has filing requirements and transition adjustments. It is not simply a setting in the software, and discovering that during a filing deadline is unpleasant.
TallyWise provides this as part of our bookkeeping services. Book a call to talk through your situation.
