Accrual basis vs cash basis
Each, defined
Accrual basis
Accrual basis — Recognizing revenue when earned and expense when incurred, regardless of when cash moves.
Cash basis
Cash basis — Recognizing revenue and expense only when cash moves. Not GAAP for any entity — it is a special purpose framework (AICPA AU-C 800), and for tax a method IRS Pub. 538 and IRC §448 limit by entity type and gross receipts.
Side by side
| Accrual basis | Cash basis | |
|---|---|---|
| Revenue recognized | When revenue is earned | When cash is received |
| Expense recognized | When the cost is incurred | When cash is paid |
| Balance sheet carries | Receivables, payables, prepaids, accruals, deferred revenue | Mostly cash and what was bought for cash |
| US GAAP | Required | Not permitted |
| A month's P&L shows | The month's real activity | The month's bank movements |
One premium, two timings
A $12,000 annual insurance premium paid on January 1. Cash basis books all $12,000 in January; accrual books $1,000 a month. Both total $12,000 for the year — only the months differ.
| Month | Cash basis | Accrual basis | Prepaid on the balance sheet |
|---|---|---|---|
| Jan 2026 | 12,000.00 | 1,000.00 | 11,000.00 |
| Feb 2026 | 0.00 | 1,000.00 | 10,000.00 |
| Mar 2026 | 0.00 | 1,000.00 | 9,000.00 |
| Apr 2026 | 0.00 | 1,000.00 | 8,000.00 |
| May 2026 | 0.00 | 1,000.00 | 7,000.00 |
| Jun 2026 | 0.00 | 1,000.00 | 6,000.00 |
| Jul 2026 | 0.00 | 1,000.00 | 5,000.00 |
| Aug 2026 | 0.00 | 1,000.00 | 4,000.00 |
| Sep 2026 | 0.00 | 1,000.00 | 3,000.00 |
| Oct 2026 | 0.00 | 1,000.00 | 2,000.00 |
| Nov 2026 | 0.00 | 1,000.00 | 1,000.00 |
| Dec 2026 | 0.00 | 1,000.00 | 0.00 |
How they relate
Both bases count the same money in the end. What differs is which month it lands in, and that decides whether a month's P&L describes the business that month or the timing of its bank account.
US GAAP requires accrual. Cash basis survives in small-business tax returns and in the bookkeeping of companies that have never needed audited statements, which is why the switch is usually forced by a fundraise or a lender.
Questions
- Can a startup use cash basis?
- Under IRC §448 a C corporation with average gross receipts above the inflation-adjusted threshold must use accrual for tax. For financial statements prepared under US GAAP, accrual is required regardless of size.
- Can the tax return use a different basis from the books?
- Yes, and many small companies do: GAAP accrual books for investors and a cash-method tax return where the tax law allows it. The difference becomes a book–tax reconciliation item.
See it computed
Worked through: the calculators, the journal entries and the tools that use these terms.
- Journal entry for prepaid insuranceWhen the premium is paid, debit Prepaid insurance and credit Cash. At each month-end, debit Insurance expense and credit Prepaid insurance for the month's share of the policy, until the prepaid balance reaches zero.Entry
- Journal entry for accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.Entry
- Journal entry for deferred revenueWhen an annual contract is invoiced up front, debit Accounts receivable and credit Deferred revenue. As each month of service is delivered, debit Deferred revenue and credit Revenue for that month's share.Entry
- Prepaid & deferred releaseA premium paid on the 17th does not release in twelve equal slices. Day-weighted, or even — your call.Tool
Definitions are the glossary’s, generated from the same documents. Figures in the examples are computed by tested functions, not typed. General information for US companies under US GAAP, not accounting or tax advice.