Cash vs accrual, in plain English

Here's a question most people never think to ask about their books: when does money actually count?

It sounds obvious. Money counts when you get it, right? Sometimes. It depends which of two rulebooks your books follow, and they give different answers for the same month.

Cash basis: it counts when it moves

On the cash basis, income counts the day money hits your account. An expense counts the day it leaves.

Say you finish a job and send a $2,000 invoice on March 28. The client pays on April 4. On the cash basis, that's April income. March never sees it.

That's the whole rule. It's simple, it lines up with your bank balance, and honestly it's how most people already think about money. If you run a small service business and get paid fairly quickly, this is probably you.

Accrual basis: it counts when it's earned

On the accrual basis, income counts when you earn it, and an expense counts when you owe it. When the cash moves doesn't matter.

Same invoice: you did the work in March, so it's March income. Until the client pays, that $2,000 sits in something called accounts receivable, which is just a fancy name for "money people owe us."

Bills work the same way in reverse. A supplier invoice you got in March counts as a March expense, even if you pay it in May.

Same month, two different answers

This is where it gets real. Say in March you:

• invoiced $10,000 of work, and clients paid $6,000 of it by the 31st
• got a $1,500 bill from a supplier, which you'll pay in April
• paid $3,000 in rent and wages

	Cash basis	Accrual basis
Income	$6,000	$10,000
Expenses	$3,000	$4,500
Profit	$3,000	$5,500

Neither of those is wrong. They're answering different questions.

Cash tells you what happened in your bank account. Accrual tells you what the business actually earned. If you've ever had a "great month" on paper and still couldn't make payroll, you've felt the gap between the two.

So which one should you use?

Cash usually fits if: you're a sole owner or a small service business, you get paid within a few weeks, and you mostly want to know where your money went. It's easy to keep and easy to read, and many small businesses can file their taxes on it.

Accrual usually fits if: you invoice and wait 30, 60 or 90 days to get paid, you carry inventory, or somebody else relies on your numbers: a lender, a partner, an investor, an accountant preparing more than a basic return.

And if you're not sure, the simplest move is to ask whoever does your taxes which basis your return uses, then keep your books on that one. Mismatched books and returns are a headache nobody needs in April.

One more thing. You don't always have to pick forever. Plenty of businesses start on cash, grow, and move to accrual when the invoices get bigger and the gaps get longer. That's normal.

How Neo-Capital handles it

We built this in on purpose. The Basic tier keeps your books on the cash basis with nothing to configure, because that's what most people starting out need. Pro and Firm let you run any report either way and flip between them in one click, so you can see what you earned and what you actually collected side by side.