Cash Accounting vs Accrual Accounting: What's the Difference?
Understand the two main accounting methods, how each records transactions differently, and which one suits your business.
Key Takeaways
- Cash accounting records transactions when money changes hands, while accrual accounting records them when they are earned or incurred regardless of payment timing.
- Cash accounting is simpler and shows real-time cash position, but accrual accounting gives a more accurate picture of financial performance.
- Most African tax authorities accept both methods for small businesses, but growing companies and those seeking investment should transition to accrual accounting.
What is cash accounting?
Cash accounting records revenue when payment is received and expenses when they are paid. If a Kampala consultant invoices a client in March but receives payment in May, the revenue is recorded in May. This method is straightforward and reflects actual bank balances. Many small African businesses, market traders, and sole proprietors use cash accounting because it aligns with how they naturally think about money and requires minimal bookkeeping expertise.
What is accrual accounting?
Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash moves. That same consultant would record the revenue in March when the service was delivered, not in May when payment arrived. This method matches revenue with the expenses that generated it, providing a more accurate picture of profitability per period. International Financial Reporting Standards and most regulatory frameworks require accrual accounting for larger entities.
Key differences
Cash accounting shows how much money you actually have right now. Accrual accounting shows how much you have earned and owe. Cash accounting can distort profitability: a business might look profitable in a month simply because several customers paid old invoices. Accrual accounting avoids this distortion but introduces complexity through receivables, payables, and adjusting entries. The choice affects reported profit, tax timing, and how stakeholders perceive your business performance.
When to use each
Use cash accounting if you run a small business with simple transactions, mostly cash sales, and no immediate plans to seek external financing. It is common among informal African businesses and sole traders. Switch to accrual accounting when your business grows, takes on credit sales, or needs to present financials to investors or lenders. Many East African fintech lending platforms now require accrual-based financial statements for larger loan applications.