Cash vs Accrual Accounting Explained for Creative Business Owners

Cash vs accrual accounting might sound like the most boring finance term in the world—but it’s one of the most important decisions you’ll ever make for your business.

In this episode of Creative Minds Smart Money, I break down the difference between cash basis and accrual basis accounting using plain language and real-world examples. From why your P&L sometimes says you lost money even after a big sale, to how unpaid invoices or prepaid retainers can distort your numbers, this episode will finally clear up the confusion.

Whether you’re a service provider working with deposits, a product-based business with inventory, or just someone who wants to actually trust their reports, this conversation will help you decide what’s right for your stage of business.

In this episode, we cover:

✅ What cash basis really means (and why it’s simpler for early-stage businesses)

✅ What accrual basis really means (and why it gives you a clearer performance picture)

✅ The pros and cons of each method

✅ How your choice impacts taxes, forecasting, and decision-making

✅ When you might be required to use accrual, especially if you sell products or carry inventory

✅ My recommendations as a CFO for when to use cash, when to switch to accrual, and why one isn’t “better” than the other—it’s about what you need from your numbers

If you’ve ever wondered “Why do my reports look wrong?” or “Am I using the right accounting method?”—this episode will finally give you clarity.

🎧 Hit play now and learn how to choose the method that fits your business, your goals, and your stage of growth.

🔗 Resources & Links

Website: https://www.firestormfinance.com/

Instagram: https://www.instagram.com/firestormfinance/

Threads: https://www.threads.net/@firestormfinance?hl=en

LinkedIn: https://www.linkedin.com/in/samantha-e-8796b6176/

Newsletter: https://firestormfinance.myflodesk.com/ajmiv1kyt1

📝 Want to see a specific topic on the show? Submit your suggestion here!

📢 If this episode helped you understand your numbers better, share it with a friend, leave a review, and help more creatives make confident money moves.

Episode Transcript

(00:01):
Welcome to the Creative Minds SmartMoney Podcast, where we turn financial
confusion into creative confidence.
I'm Samantha Eck, bookkeeper andfractional CFO for creative entrepreneurs.
Each week I'm sharing myfinancial expertise and actionable
strategies to help you builda thriving creative business.
Plus, you'll hear from industry expertswho bring fresh perspectives on growing

(00:23):
your business beyond the numbers.
Because building a successfulcreative business starts with
strong financial foundations.
Your next chapter starts now.
Welcome back to another episode ofCreative Finds Smart Money, and today's
another topic I probably should havetalked about a long time ago, but
we're gonna get into it anyways.

(00:44):
It is cash versus accrual accounting, andyou're probably looking at me and saying,
Samantha, that is way over my head.
That is a finance termI've never understood.
I don't get what you're talking about.
You're crazy free from bringing it up,but I promise you it'll make a whole lot
more sense once we actually get into it.
So it's one of the most confusingfinancial topics out there, and it's

(01:07):
actually one of the most important ifyou actually wanna trust your numbers.
So when you make a 10 K sale, but yourreports still say you lost money or
you finally got paid, but your profitlooks great before the cash hit.
It's a lot of frustrationthat is built from that.
So I'm gonna get.
Into this today and help you makesense of what cash versus accrual
is, using some real word examplesand then breaking down the pros and

(01:29):
cons to help you choose what's rightfor your business stage, and kind of
like what's right for you right now.
So right now, let's talkabout what the difference is.
So on a cash basis, it meansthat you recognize your income
when cash hits the bank.
So if I were to pay you todayand two days later, the cash paid
hits the bank, that is cash basis.

(01:50):
You've recognized that income,it comes in and you recognize
expenses when you actually pay them.
So if you have.
For example, you took somethingout on your credit card, that
expense is actually paid.
So it's a simple rule, which meansno money movement equals no entry.
So for example, you invoice aclient in June and they pay in July.
It counts as July income.
It's not June income.
Even though you invoice them in June,your order prints in June, but you

(02:13):
pay the bill in August, it counts inAugust, it doesn't count in June again.
So those kind of like differences there.
With accrual basis, yourecognize income when it's
earned regardless of the payment.
Timing.
So you could get paid in July,but not earn it until August.
And then you also recognizeexpenses when they're incurred,

(02:33):
even if they are paid later.
So if you sent out an invoice in June.
That's June income, evenif you get paid in July.
So that invoice will showup on your June income.
If you ordered supplies in June, thatis a June expense, even if you pay it in
August because you have something likeaccounts receivable, accounts payable.
So to give you a little bit more oflike an analogy and kind of like how you

(02:56):
can think about this is cash is what'shappening in your wallet and accrual
is what's happening in your planner.
So let's kind of come upwith a visual example here.
So let's say you invoice $5,000 in June.
That money in accrual exampleis going to come out in June.
So on a cash basis, p and l,obviously if you get that money

(03:16):
in July, it's gonna count in July.
But if it comes in a cash, in acash basis, it's gonna hit in June.
Even if your client pays you inJuly, it doesn't matter because that
money is technically earned in June.
And then for your software expenses, ifyou billed in June, but you paid in July.
As an accrual basis, that's gonnacount in June, but a cash basis,

(03:38):
that's gonna count in July.
So when we think about this, andwe look at this June income for our
cash basis, p and l is gonna be zeroincome, zero expenses, zero profit.
Whereas an accrual basis isgonna be $5,000 income, $200,
$200 expense, $400,800 profit,and then July again 0, 0, 0.

(03:58):
So again, the point is that the cashbasis is gonna tell you what's in
your account, but not necessarilywhat you're actually making.
The accrual basis tells you whatyou earned and owe even if it
hasn't moved yet, even if themoney's kind of still sitting there.
I know that sounds confusing.
So we're really gonna go intothis, a little bit more and
talk about it so that you can.
Get more of a visibilityand understanding of it.

(04:21):
So let's talk about the pros andcons between the two of them.
And let's start with a cash basis.
So first of all, it's simpleto understand and track and.
Actually, a lot of my clients use cashbasis when they're very, very small.
It matches your bank account to show youwhat's actually there, and obviously it's
easier for small businesses with a really,really tight cash flow, but it can look

(04:42):
misleading, like you're broke when you'renot, or profitable when you're overdrawn.
It doesn't match when workis done versus when paid.
And it can hide really big issues.
For example, like a lot of un, lotsof unpaid invoices, things like that.
It can just cause a lot of really big.
It's a lot of really big issues.
For the accrual basis, it gives you aclear picture of your performance over

(05:05):
time, so we're matching income andexpenses to when they actually happen,
which helps with forecast and goaltracking, and of course, decision making.
It does make it a little bit more complex.
Because if it doesn't match your bankbalance, you might look profitable,
but you could have $0 in cash.
And then of course, with accrual,accrual is where you really

(05:26):
kind of need that bookkeeping.
That bookkeeping help becauseAccrual County becomes a lot
more, I guess, interesting.
There's a lot of different journalsand things like that that need to
be set up with accrual accounting.
Most small businesses can use cashbasis for tax filing if they're
under $25 million in revenue.
So actually most of the businessesthat I work with use cash basis

(05:48):
because it's just that much easier.
They don't need accrual.
And they don't have accounts forsaveable and payable, they don't pay on
terms, they don't , process on terms.
They just wanna get the moneywhen it hits their account.
If you carry inventory, you might berequired to use accrual basis accounting.
So you'll have to look into kindof like the, the rules around that.
'cause it's different per state.
It's also different, dependingon what you're selling.

(06:08):
Accrual becomes required if you growlarge enough, so it's good to understand
it really early and get, just a clearunderstanding of what's going on with him.
So what do I recommendas a CFO and bookkeeper?
If you're early stage, you're verysmall, you're very cash conscious.
I really do recommend doing cash basis.
It's a valid starting point andas long as you know what it's
not telling you, it's it works.

(06:31):
I recommend though, accrual, if youreally want scaling and insight and you
don't just want to go with off of what'sjust in your bank mouths, like if you
want to understand it a little bit more,then I definitely recommend accrual
basis and it's gonna help you to just.
Again, have that forecast, havethat profitability analysis.
Everything like that is gonna be alot easier when you have numbers that

(06:52):
actually reflect in the months thatthey occurred instead of months later.
So I want you to understand as wellthat one isn't better than the other.
Accrual accounting isn't betterthan cash accounting, of course.
It's about what you needyour numbers to do for you.
So you can run on cash accountingif you're under 25 million.
Like if you have a business thatyou're only making two 50 KA
year, you're happy with that.
You're like, I don't wanna ever switch.

(07:12):
Don't.
But if you're like, I really need moreclarity, insight, and understanding
of the numbers, then switchingto accrual isn't a bad option.
If you aren't sure what you're currentlyusing or if you should switch, just
again, message me on Instagram, tome an email, whatever it is, and
let's kind of talk about what it isthat you're currently doing and how
we can transition if you want to.
As always, if you found this episodehelpful, please leave a comment like

(07:36):
it, subscribe, and of course share iton social media so that we can get more
people like you to listen to the podcast.
Otherwise, you guys, I wish you the bestweek ever and we'll see you next week.
Farewell fellow Travelers.