The Cash or Accrual Accounting Method is one of the most important decisions businesses must make when setting up their accounting systems. This method determines when businesses recognize revenue and expenses for taxation and bookkeeping purposes, as well as how often they need to pay their tax obligations.

The cash-basis accounting method records income when cash is received and expenses when cash is paid out. This is an attractive option for small businesses, because it’s simple to understand and easy to implement. However, there are drawbacks: it may not be the best option for businesses with high levels of inventory or other noncash transactions, or ones that have irregularly timed payments or receipts.

The accrual basis accounting method recognizes income when goods or services are delivered, regardless of when the customer pays, and records expenses when a business incurs them regardless of when the amounts are actually paid. This method gives a more accurate picture of financial performance over time but requires careful tracking and monitoring since items may be recorded in one period but actually paid much later.