Under accrual accounting, if you send a $5,000 invoice in December but don't get paid until February, that $5,000 shows up as December revenue. Similarly, if you receive a vendor bill in November but pay it in January, it's a November expense.
The alternative is cash-basis accounting, where everything is recorded when money actually moves. Most small businesses use cash-basis because it's simpler and matches what they see in their bank account.
Which method is right for your business?
The IRS generally allows businesses under $25 million in annual revenue to use cash-basis accounting. For most small businesses, cash-basis is simpler, easier to maintain, and gives a clear picture of actual liquidity. Accrual accounting gives a more accurate picture of profitability over time, but requires more discipline and is harder to reconcile without accounting software.
Ketchup Bookkeeping uses cash-basis accounting. It's IRS-compliant, CPA-ready, and the most practical method for the businesses we serve.
When accrual makes sense
If you carry significant inventory, have complex accounts receivable, or are preparing for outside investment or a sale, accrual accounting may be required. Talk to your CPA if you're unsure which method fits your situation.
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