This choice sounds academic until the first time your Profit and Loss tells you a story you do not recognize. Then it becomes very concrete.
Cash and accrual are two different answers to one question: when does a transaction count?
The difference in one example
You finish a job on March 28. You invoice the client that day. They pay on May 10.
Cash basis: the revenue is May income. Nothing happened in March.
Accrual basis: the revenue is March income, when you earned it. May is just the money arriving.
Same work, same money, different month. Multiply that across a year and the two methods can describe noticeably different businesses.
Cash basis
You record income when money arrives and expenses when money leaves.
What is good about it: it is simple, it needs no judgment calls, and it matches how most owners already think. It also tells you something true and immediately useful, which is what actually happened to your cash.
What it hides: it says nothing about money owed to you or by you. A month where three big invoices happened to land looks spectacular. The following month, where you did just as much work but collected nothing, looks like a collapse. Neither is describing your business accurately.
There is also a timing effect at year end. Money collected on December 31 versus January 2 lands in different tax years, which some businesses manage deliberately.
Accrual basis
You record income when you earn it and expenses when you incur them, regardless of when money moves.
What is good about it: it matches revenue to the work and the costs that produced it, so each month describes that month’s actual performance. If you invoice on terms, this is the only version that tells you whether you are profitable.
What it demands: more bookkeeping. You are tracking Accounts Receivable, money you have earned and not collected, and Accounts Payable, costs you have incurred and not paid. Those are real balances that have to be maintained rather than derived from the bank feed.
The trap: accrual profit is not cash. You can show an excellent month on paper while the bank account empties, because the revenue is sitting in receivables. That is not a bug, it is the method doing its job, but it catches people who read the P&L as a cash statement. It is the profitable but broke problem in its purest form.
Which one fits you
Cash basis is usually right if you get paid at or near the time of service, you have no inventory, you do not invoice on terms, and you want the simplest thing that works. Most solo service businesses in San Antonio are here.
Accrual is usually right if you invoice with payment terms and carry meaningful receivables, you hold inventory, you run jobs that span months, or you are seeking financing or planning to sell.
That last point is worth flagging early: lenders, investors and buyers generally want accrual statements, because cash basis can be timed and does not show obligations. If any of that is on your horizon, it is far easier to have been on accrual than to convert history later.
There are also rules that can require accrual once a business passes certain size thresholds, particularly with inventory. If you are growing quickly, ask before assuming the choice stays yours.
The hybrid most businesses actually want
Here is the practical answer that rarely gets mentioned: many businesses run accrual books for management and report on cash basis for tax, where that is available to them.
You get monthly reports that describe performance honestly, and you keep the simpler tax treatment. The cost is maintaining a reconciliation between the two, which is ordinary work rather than exotic.
This is a decision to make with whoever prepares your return, because the tax side has rules, and changing methods for tax purposes generally requires IRS consent rather than just deciding to do it differently. It is not a switch you flip.
What this actually changes for you
Whichever method you use, the discipline underneath is the same. Reports are only as good as the data, and neither method survives unreconciled books. Accrual is less forgiving, because it depends on receivable and payable balances that have to be maintained rather than read off a bank statement.
If you are on cash basis, one habit compensates for most of what it hides: look at your outstanding invoices alongside your P&L. The report tells you what you collected; the receivables list tells you what you earned and are still owed. Together they get you most of the way to the accrual picture without the bookkeeping overhead.
The short version
Cash basis counts money when it moves and suits businesses that get paid promptly. Accrual counts it when earned, tells the truth about performance, and demands more bookkeeping. Most small service businesses are correctly on cash. Businesses with receivables, inventory or financing plans usually need accrual.
Whichever you pick, reconcile every month, because both methods produce confident nonsense on unverified data.
If you are not sure which one your books are currently on, or your reports do not match the months you lived through, send me three months of statements and I will build you a real Profit and Loss free, and we can look at which method actually fits how you get paid.