Cash vs accrual accounting: differences with examples

Published Monday 26 October 2026

Table of contents

• Difference between cash and accrual accounting
• What is cash basis accounting?
• What is accrual basis accounting?
• Which accounting method should you choose?
• Hybrid methods of accounting
• Manage cash or accrual accounting with Xero
• FAQs on cash vs accrual accounting

Key takeaways

• Choose cash basis accounting if your business is small with simple transactions and no inventory, as it shows exactly how much cash you have available.
• Select accrual accounting if you carry inventory, plan to seek funding, or need accurate profitability reports, since it matches income with the expenses that generated it and provides a clearer picture of business performance.
• In Malaysia, Sdn Bhd companies prepare accrual-basis financial statements under the Malaysian Private Entities Reporting Standard (MPERS) or Malaysian Financial Reporting Standards (MFRS), as required by the Companies Act 2016.
• Talk to an accountant before switching accounting methods, as the change needs adjustments to avoid counting income or expenses twice.

Difference between cash and accrual accounting

Cash basis accounting records income and expenses when money changes hands. Accrual basis accounting records them when you earn the income or incur the expense, regardless of when payment occurs.

The key difference is timing: cash basis tracks actual cash flow, while accrual basis tracks financial commitments. This guide goes deeper than the short glossary definition of cash vs accrual basis.

Accrual accounting gives you a more accurate picture of profitability and long-term financial health, which is why major standards like International Financial Reporting Standards (IFRS) require financial statements to be prepared using the accrual basis of accounting. Cash accounting offers simplicity and shows exactly how much money you have available right now.

What is cash basis accounting?

Cash basis accounting records transactions only when money physically moves in or out of your business. You recognise income when you receive payment and expenses when you pay a bill. Unpaid invoices and outstanding bills don't appear in your records until they're settled.

Who uses cash basis accounting?

Cash basis accounting works best for:

• Freelancers: Simple transactions and straightforward income tracking
• Small service businesses: No inventory to track and relatively few outstanding invoices
• Sole proprietors and small unincorporated businesses: Simple transactions that are easy to track as money comes in and goes out
• Startups in early stages: When cash flow visibility matters more than long-term financial planning

If your business has inventory, complex transactions, or plans to seek outside funding, accrual accounting may be a better fit.

Benefits of cash accounting

• Simplicity: Shows exactly how much cash you have available at any time
• Clear cash position: Your records match the money in your bank account, which makes day-to-day cash flow easy to follow

Note: Not all businesses can use cash basis accounting for tax purposes. Check with your tax office or accountant.

Downsides of cash accounting

• Incomplete picture: May show profit when you still have unpaid bills, masking your true financial position
• Limited planning insight: Provides only a day-to-day cash view, making it harder to forecast and make strategic decisions

Example of cash basis accounting

Imagine you run a consulting business. In March, you complete a project and invoice your client for RM5,000. The client pays you in April.

With cash basis accounting:

• March: No income recorded (you haven't received payment yet)
• April: RM5,000 recorded as income (when the money hits your account)

Your March financial reports show no revenue from this project, even though the work was completed.

What is accrual basis accounting?

Accrual basis accounting records income when you earn it and expenses when you incur them, regardless of when cash changes hands. You recognise revenue as soon as you invoice a customer and expenses as soon as you receive a bill, even if payment happens weeks later.

Who uses accrual accounting?

Accrual accounting is typically used by:

• Businesses with inventory: Required to match the cost of goods sold with related revenue
• Sdn Bhd companies: Required to prepare financial statements under MPERS or MFRS, which use the accrual basis
• Businesses seeking funding: Investors and lenders expect accrual-based financial statements
• Companies following Generally Accepted Accounting Principles (GAAP) or IFRS: These standards require accrual accounting

If you're planning for growth, working with investors, or need accurate profitability reports, accrual accounting is usually the better choice.

Benefits of accrual accounting

• Accurate performance tracking: Shows true profitability by matching income with the expenses that generated it
• Better decision-making: Gives you visibility into future cash commitments and expected income
• Easier access to funding: Gives you an advantage with lenders and investors who often prefer accrual-based financial statements

Downsides of accrual accounting

• More complexity: Requires tracking invoices and bills separately from your bank account
• Tax timing mismatch: May require paying tax on income before receiving payment (though you can claim adjustments if customers don't pay)

Example of accrual accounting

Using the same consulting scenario: you complete a project in March and invoice your client for RM5,000. The client pays in April.

With accrual accounting:

• March: RM5,000 recorded as income (when you earned it by completing the work)
• April: Payment received, but no new income recorded (it was already recognised)

Your March financial reports accurately reflect the revenue you earned that month, giving you a clearer picture of when your business generated value.

Which accounting method should you choose?

The right accounting method depends on your business size, complexity, and goals. Here's how to decide.

Choose cash basis accounting if:

• your business is small with simple, straightforward transactions
• you don't carry inventory
• cash flow visibility is your primary concern
• you run a sole proprietorship rather than a Sdn Bhd company

Choose accrual accounting if:

• you carry inventory or have complex transactions
• you're planning to seek loans or investment
• you need accurate profitability reports for decision-making
• your business is a Sdn Bhd or must report under MPERS or MFRS

Talk to an accountant if you need help deciding. They can assess your specific situation and recommend the method that works best for your business now and as you grow.

Hybrid methods of accounting

Hybrid accounting combines elements of both methods. Some businesses use accrual accounting for financial statements and loan applications while using a cash view to track day-to-day cash flow.

Specific rules govern who can use hybrid methods. Talk to an accountant or tax professional to find out what applies to your business.

Manage cash or accrual accounting with Xero

Accrual accounting gives a clearer picture of business performance by showing when income and expenses actually occurred. If you want to know whether a specific month was profitable, accrual accounting tells you.

Cash basis accounting works well for tracking day-to-day cash flow. However, most growing businesses use accrual as their primary method.

Modern accounting software handles much of the complexity for you. It can automatically record invoices as income when you raise them and track bills as expenses when they arrive. If you use a hybrid approach, the right software lets you switch between views whenever you need.

Xero supports both cash and accrual accounting, making it easy to manage your finances your way. Get one month free and see how simple accounting can be.

FAQs on cash vs accrual accounting

Here are answers to common questions about choosing and using cash versus accrual accounting.

How do I know if I'm using cash or accrual accounting?

Check when your accounting system records income. If it records revenue when you receive payment, you're using cash basis. If it records revenue when you issue an invoice, you're using accrual basis.

Which method does LHDN require?

A Sdn Bhd prepares accrual-basis financial statements under MPERS or MFRS and files Form C with the Inland Revenue Board of Malaysia (LHDN) based on those accounts.

Sole proprietors report their business income on Form B. You need to keep your business records for seven years.

Is GAAP accounting accrual or cash basis?

GAAP (Generally Accepted Accounting Principles) requires accrual accounting. If your business must follow GAAP for investors, lenders, or regulatory reasons, you'll need to use accrual basis.

Can I switch from cash to accrual accounting (or vice versa)?

Yes, but switching needs adjustments to avoid counting income or expenses twice (or missing them entirely). Discuss any change of accounting basis with your tax agent before your next Form C or Form B filing.

How does each method affect my taxes?

Under section 24 of the Income Tax Act 1967, business income from goods sold or services rendered is generally taxed when the debt arises, so you may owe tax on invoiced income before you collect it, whichever method you use for your own records. Your tax agent can explain how this affects your cash flow.