Cash vs. Accrual Accounting in QuickBooks Online
Choosing and managing your accounting method—what it means for your business.
Key Takeaways
- •Accrual accounting gives a more accurate picture of business performance
- •Cash accounting is simpler and matches your bank account
- •QBO can display reports on either basis—you can use both views
- •For inventory, significant AR/AP, or audits, accrual is typically required
- •Start with accrual if possible—converting later is more difficult
Cash Basis
- • Revenue when cash received
- • Expenses when cash paid
- • Matches your bank account
- • Simpler to understand
- • May distort profitability timing
Accrual Basis
- • Revenue when earned (invoiced)
- • Expenses when incurred (billed)
- • Shows true performance
- • Required for GAAP/audit
- • Better for decision-making
Cash vs. accrual is one of the most fundamental accounting decisions. It affects how you understand profitability, how you pay taxes, and how investors or lenders view your financials.
Cash vs. Accrual Comparison
Cash Basis
- • Revenue: when cash received
- • Expenses: when cash paid
- • Matches bank account
- • Simpler to understand
- • Can distort profitability timing
Accrual Basis
- • Revenue: when earned (invoiced)
- • Expenses: when incurred (billed)
- • Doesn't match bank account
- • More accurate picture of performance
- • Required for GAAP/audit
Our Recommendation
Use accrual as your primary method. QBO can always show you cash-basis reports for tax purposes. Starting with accrual is easier than converting later. If you have inventory or expect to be audited, accrual will be required anyway.
When Cash Basis Makes Sense
- Very small businesses with simple transactions
- Service businesses with no inventory and minimal AR/AP
- When cash flow visibility is more important than profitability tracking
- When your tax advisor specifically recommends it
When Accrual Basis is Required or Preferred
- Businesses with inventory (IRS requirement for larger businesses)
- Companies that will be audited
- Businesses seeking loans or investors (they expect accrual)
- When you want accurate monthly profitability
- Gross receipts over $25M (IRS requirement)
Frequently Asked Questions
What's the difference between cash and accrual accounting?
Cash basis recognizes revenue when money is received and expenses when paid. Accrual basis recognizes revenue when earned (invoiced) and expenses when incurred (billed), regardless of cash timing. Accrual gives a more accurate picture of business performance; cash shows actual cash movements.
Which accounting method should my business use?
Accrual is generally better for understanding business performance. Cash is simpler and matches your bank account. The IRS allows cash basis for businesses under $25M in gross receipts (with some exceptions). If you have inventory, significant AR/AP, or will be audited, accrual is typically required or preferred.
Can I see both cash and accrual reports in QuickBooks?
Yes, QBO can display most reports on either basis using a dropdown toggle. You don't need to change your underlying accounting method—just change the report view. This lets you run accrual for management while having cash-basis reports for tax purposes.
How do I switch from cash to accrual in QuickBooks?
You can switch your default reporting basis in Settings > Account and Settings > Advanced. However, this only changes report defaults. Proper conversion from cash to accrual requires adjusting entries for AR, AP, prepaid expenses, and accrued liabilities. Consult an accountant for the conversion.
Need Help With Accounting Method Selection?
Eagle Rock CFO helps growing businesses choose and implement the right accounting methods for their situation.
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