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Cash vs Accrual Accounting | Which Is Right for You? 

💵 Cash vs. Accrual Accounting​

Which Is Right for You?

 

At FPG-USA, one of the first questions we help clients answer is:
Should you manage your books using the cash basis or the accrual basis?

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The method you choose affects everything—from tax filings and compliance to financial clarity and strategic decision-making. Many business owners start with cash accounting for simplicity, but as they grow, accrual accounting often becomes necessary (or even required).

 

This guide breaks it down, without the jargon—so you can make the right choice for your business.

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— Richard Kahn, Founder & CFO, FPG‑USA

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1. Cash Basis Accounting: What It Is
2. Accrual Basis Accounting: What It Is
3. Cash vs. Accrual: Key Differences
4. IRS Rules: Who Can Use Cash Basis?

1️⃣ 💰 Cash Basis Accounting: What It Is

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Cash basis accounting is simple:

You record income when cash is received, and expenses when cash is paid.

If a client pays you today, that’s income today. If you pay a bill tomorrow, that’s an expense tomorrow—even if the bill was for last month.

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Common Users of Cash Basis:

  • Small service businesses

  • Freelancers and consultants

  • Real estate professionals

  • Companies without inventory

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2️⃣ 📈 Accrual Basis Accounting: What It Is

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Accrual accounting recognizes income when it’s earned and expenses when they’re incurred—regardless of when the cash moves.

 

If you send an invoice today, it’s income today—even if you don’t get paid until next month.
If you receive a bill today, it’s an expense today—even if you pay it later.

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Common Users of Accrual Basis:

  • Companies with inventory or cost of goods sold

  • Businesses offering payment terms (Net 30, Net 60)

  • Growing businesses preparing for financing or investors

  • Entities needing GAAP-compliant reporting

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3️⃣ ⚖️ Cash vs. Accrual: Key Differences

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​​​​​4️⃣ 🧾 IRS Rules: Who Can Use Cash Basis?

Many small businesses are allowed to use cash basis accounting for tax purposes, but there are limits.

2025 IRS Guidelines:

  • Businesses with under $27 million in average annual gross receipts can generally choose cash basis for tax reporting.

  • Certain businesses—like C Corporations, manufacturers, or those holding inventory—may be required to use accrual accounting unless specific exceptions apply.

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5. Pros and Cons of Each Method

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5️⃣ ✅ ❌ C Pros and Cons of Each Method

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6️⃣ 🔍 How Your Choice Impacts Strategy and Taxes

Choosing between cash and accrual isn’t just about accounting—it’s about strategy.

  • Cash basis can simplify tax reporting for smaller businesses.

  • Accrual basis provides better insights into profitability, especially if you’re scaling, seeking investment, or managing deferred revenue.

Switching from cash to accrual (or vice versa) requires IRS Form 3115 and professional guidance to avoid tax traps.

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7️⃣ 🤝 How FPG-USA Helps You Decide

At FPG-USA, we help clients make the right accounting method decision—not just for taxes, but for strategic growth.

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Here’s how we help:

  • Review your current accounting method and explain how it affects cash flow, taxes, and financial reporting

  • Evaluate whether switching to accrual or cash basis makes sense based on IRS rules and your industry

  • Ensure your accounting system matches your business model and goals

  • Provide support for IRS Form 3115 if a change is needed

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🔍 Examples of How We Help Clients

  • Real Estate Professional: Stayed on cash basis to simplify rental property management, but added strategic tracking of accrual-based expenses for better budgeting

  • E-Commerce Business: Switched from cash to accrual to prepare for bank financing and account for inventory properly

  • Service Firm: Remained on cash basis for tax efficiency but layered in accrual reporting for internal decision-making and investor discussions

  • Consulting Agency: We advised a hybrid system—cash for tax filings, accrual for forecasting and profitability analysis

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Whether you’re a small business keeping it simple, or a growing company ready for next-level financial clarity, our team is here to help.

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8️⃣ 📊 Why Accrual Accounting Matters for GAAP

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6. How Your Choice Impacts Strategy and Taxes
7. How FPG-USA Helps You Decide
8. Why Accrual Accounting Matters for GAAP

If your business needs to follow GAAP (Generally Accepted Accounting Principles)—for example, if you’re preparing for investment, lender reporting, or financial transparency—accrual accounting is required.

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GAAP-compliant reporting means:

  • Recording revenue when earned, not when paid

  • Matching expenses to the related income period

  • Providing complete financial statements, including receivables, payables, and deferred revenue

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🔍 Will Your Business Need GAAP?

  • Many small businesses do not require full GAAP compliance

  • But if you’re raising capital, working with banks, or planning an exit, following accrual-based GAAP reporting may be essential

  • In many cases, businesses keep cash basis for tax filings and accrual-based reporting for strategic purposes

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Learn More:👉 What is GAAP? 

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Schedule

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🚀 Curious which method fits your business best?

Let’s have a friendly, no-pressure conversation with our CFO.​

👉 Schedule Your Free CFO Strategy Call ›

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