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What is the difference between the cash and accrual method of accounting and which one should I use for my business?

The difference between the cash and accrual method of accounting is the timing of when income and expenses are reflected on the balance sheet and profit and loss statement.

Under the cash method, income is reported when cash is received from customers, and expenses are reported when cash is disbursed to vendors. Under the accrual method of accounting income is reported when invoiced or earned (not when cash is received) and expenses are reported when a purchase of goods or services is made (not when cash is paid).

To get a true picture of the financial position and results of operations of a business, you must use the accrual method. The good news is that most small businesses can elect to use the cash basis method of accounting for tax purposes if that method will result in lower taxable income and use the accrual method for financial statement purposes. – Gary Cates, CPA