Cash vs. accrual: which basis should your reports use?

You invoiced $20,000 in March and got paid $8,000. Did you make money in March? The answer depends on which basis your reports use, and many small business owners don't know which one they're looking at.

The difference in one sentence

Accrual basis records income when you earn it (when you send the invoice) and expenses when you incur them (when the bill arrives). Cash basis records them when money actually moves in or out of your bank account.

What each one tells you

• Accrual answers "how did the business perform?" It matches the work you did in a month with the costs of doing it, so a big job shows up in the month you did it, not the month the customer finally paid.
• Cash answers "where did the money go?" It's closer to your bank balance, and it's what many small businesses use for their tax return.

Which one to use

You don't have to choose just one for your own reports. A healthy habit is to read your profit and loss on an accrual basis to judge performance, and check cash basis to understand what's actually available to spend.

For taxes, the basis you file on is a decision for you and your accountant, and once you choose it, you generally stick with it. The IRS explains the rules in Publication 538.

How MitoBooks handles both

Every report in MitoBooks that depends on the basis has a switch between Accrual and Cash. You don't keep two sets of books: MitoBooks keeps one ledger and builds the cash view from the dates payments were actually made. See Running reports for which report answers which question.