Cash vs accrual accounting: which method suits your business?

Published Tuesday 6 October 2026

Table of contents

• What is accrual basis accounting?
• What is cash basis accounting?
• How accrual accounting works
• Accrual accounting examples
• Cash vs accrual accounting: key differences
• When to use accrual vs cash accounting
• Hybrid methods of accounting
• Simplify your accounting with Xero
• FAQs on cash vs accrual accounting

Key takeaways

• The key point in cash vs accrual accounting is timing: accrual records revenue when you earn it and expenses when you incur them, giving you an accurate picture of performance.
• Choose accrual accounting if you carry inventory, need accurate profit figures, plan to seek loans or investment, or must use it under tax rules.
• Consider cash accounting for simple service businesses with few outstanding invoices where you want simple records and need to track actual cash flow closely.
• Talk to an accountant before switching methods or using a hybrid approach, as rules vary by jurisdiction and you'll need to adjust records to avoid counting income or expenses twice.

What is accrual basis accounting?

Accrual basis accounting records revenue when you earn it and expenses when you incur them, regardless of when cash changes hands. If you send an invoice in December but receive payment in January, you record the revenue in December. The same applies to expenses: when a bill arrives, you record it immediately, even if you pay 30 days later.

What is cash basis accounting?

Cash basis accounting records income and expenses only when money changes hands. You don't count an invoice as income until the customer pays, and you don't record a bill as an expense until you settle it.

The name refers to when you record transactions, so you can receive electronic payments and still use cash basis accounting.

How accrual accounting works

Accrual accounting follows two core principles: record revenue when earned and record expenses when incurred. It's usually paired with double-entry bookkeeping, where every transaction affects at least two accounts.

Recognising revenue when earned

Recognising revenue means recording income when you complete the work or deliver the product, rather than when payment arrives. Global accounting standards set out five steps in recognising revenue, starting with identifying the contract and its performance obligations. For example:

• Service business: record revenue when you finish the job, even if the client pays next month
• Product business: record revenue when goods ship or the customer takes possession
• Subscription business: record revenue as you deliver each month of service

This approach shows what you truly earned in any given period.

Recording expenses when incurred

Recognising expenses means recording costs when you receive goods or services, rather than when you pay the bill. For example:

• Supplier invoice: record the expense when the invoice arrives
• Utility bill: record the expense for the period it covers, even if billed later
• Employee wages: record wages for the period worked, whatever the pay date

When you match expenses to the period they relate to, you get accurate profit figures.

Accrual accounting examples

These small business scenarios show how accrual accounting works in practice. Each one compares recording transactions when they occur with recording them when cash changes hands.

Revenue recognition example

A web designer completes a project on 28 December and sends an invoice for S$5,000. The client pays on 15 January.

• Accrual accounting: record S$5,000 revenue in December (when earned)
• Cash accounting: record S$5,000 revenue in January (when paid)

The accrual method shows December as the profitable month, reflecting when the work actually happened.

Expense recognition example

A retailer receives S$2,000 worth of inventory on 20 December. The supplier's payment terms are 30 days, so payment goes out on 19 January.

• Accrual accounting: record S$2,000 expense in December (when goods received)
• Cash accounting: record S$2,000 expense in January (when paid)

The accrual method matches the expense to the period when you received the goods and could sell them.

Cash vs accrual accounting: key differences

The main difference between cash and accrual accounting is timing. Cash accounting records income and expenses when money changes hands, while accrual accounting records them when you issue an invoice or receive a bill.

That timing shapes what your reports tell you. Cash accounting shows your cash position, so you know exactly what's in the bank today. Accrual accounting shows your true profit for a period, because income and expenses land in the month they relate to.

The methods also differ in effort and tax timing. Cash accounting is simpler because your bookkeeping records largely mirror your bank statement, while accrual means tracking unpaid invoices and bills. With cash accounting, tax generally follows money received; with accrual, you may owe tax on income before customers pay.

Pros and cons of cash accounting

Cash accounting suits businesses that want simple records and a clear view of cash. Here are its main pros and cons.

• Pro: you track only actual money in and out, so your records stay simple
• Pro: you know exactly how much money you have on hand
• Pro: you pay tax only on money you've received, where cash basis is allowed
• Con: you may appear profitable simply because you haven't paid your bills yet
• Con: you see only day-to-day finances, which limits longer-term planning
• Con: you may struggle to make informed growth decisions without complete financial data

Pros and cons of accrual accounting

Accrual accounting gives you a complete view of performance in exchange for more record-keeping. Here are its main pros and cons.

• Pro: you see a true picture of business performance and finances
• Pro: you make financial decisions with confidence, based on complete data
• Pro: you can present accurate financials when applying for loans or investment
• Con: you track invoices and bills as well as your bank balance
• Con: you may pay tax on income before customers pay you
• Con: you need to adjust for bad debts and claim tax back if a customer fails to pay

When to use accrual vs cash accounting

The right method depends on your business size, industry and growth plans. Use these checklists to see which fits.

Consider accrual accounting if you:

• carry inventory or have complex transactions
• need accurate monthly or quarterly profit figures
• plan to seek loans or outside investment
• want to track accounts receivable and payable
• are required to by tax authorities (often based on revenue thresholds)

Consider cash accounting if you:

• run a simple service business with few outstanding invoices
• want the easiest possible bookkeeping
• need to track actual cash flow closely
• qualify for cash basis tax reporting in your jurisdiction

Consider hybrid accounting if you:

• need accrual reports for lenders but prefer cash basis for tax
• want flexibility to view finances both ways
• have specific industry or regulatory requirements

Check with your accountant or tax adviser about what's required in your jurisdiction. Some businesses must use accrual accounting once they reach certain revenue thresholds. Globally, International Financial Reporting Standards (IFRS), which are based on accrual principles, are used in most of the jurisdictions profiled by the IFRS Foundation.

Hybrid methods of accounting

Hybrid accounting combines both methods, using accrual for some purposes and cash basis for others. Some businesses use this approach to:

• base major financial decisions on accrual accounting
• simplify tax reporting with cash basis where allowed
• satisfy lender needs while managing day-to-day cash flow

Rules vary by jurisdiction and business type. Speak to an accountant or tax professional to find out what applies to you.

Simplify your accounting with Xero

Whether you choose cash, accrual or a hybrid method, the right software makes managing your books straightforward. Xero lets you run reports on a cash or accrual basis and automates much of the work:

• Record transactions automatically: invoices and bills flow into your accounts as you create them
• Switch reporting views: move between cash and accrual reports with a click
• Reconcile bank transactions: match transactions automatically to save time
• See finances in real time: view your financial position whenever you need it

Ready to simplify your accounting? Get one month free and see how Xero handles cash and accrual accounting for your business.

FAQs on cash vs accrual accounting

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

Which accounting method suits small businesses in Singapore?

Cash basis can suit very small service businesses with few invoices, while accrual suits businesses with inventory, credit terms or plans to seek financing. For GST, IRAS's Cash Accounting Scheme lets eligible GST-registered businesses with annual taxable turnover up to S$1 million account for output tax on receipt and claim input tax when paying suppliers. Speak to an accountant to confirm which approach fits your business.

Can I switch from cash to accrual accounting?

Yes, you can switch methods, but you'll need to adjust your records to avoid counting income or expenses twice. Work with an accountant to make the transition smoothly and understand how your taxes may be affected.

Does my business have to use accrual accounting?

Requirements vary by jurisdiction and business size, and many tax authorities require accrual accounting once revenue passes certain thresholds. Check with your accountant or tax office for the rules that apply to your business.

How does accrual accounting affect my taxes?

With accrual accounting, you may owe tax on income before customers pay you, so plan ahead for tax bills on unpaid invoices. In return, tax authorities get a clearer picture of how your business actually operates.

Can I use both cash and accrual accounting?

Yes, some businesses use a hybrid approach. You might use accrual accounting for financial reporting and management decisions while using cash basis for certain tax purposes where allowed.

Which accounting method does Xero support?

Xero lets you run reports on a cash or accrual basis. You can switch views as needed to meet different reporting needs.