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Cash versus accrual accounting. Cash versus accrual accounting isn’t about how much money you have, it’s about when you record it.
In cash accounting, you only record money when it physically moves. If a check hits your account today, it goes on today’s books.
In accrual accounting, you record money when it’s earned or owed, even if no money has changed hands yet. Do the gig in May and get paid in July. Under accrual, it still counts for May.
Say you sign a $2,000 contract in May, but the payment doesn’t arrive until July. Cash accounting shows $0 in May, and $2,000 in July. Accrual accounting shows $2,000 in May, because that’s when you earned it. Same money, two different pictures.
Most of us use cash accounting in our personal lives. We check our bank balance and say, “That’s what I have.” But you’re thinking, “My landlord hasn’t cashed my rent check yet, so I really have less.” Or, “Payday’s Friday, so I’ll have more soon.” You’re already dabbling in accrual thinking. Doing it officially means you’re recording it consistently.
Why does it matter? Cash is simpler and totally fine for small projects, but accrual gives you a fuller, more accurate picture, especially if you’re juggling grants, managing multiple programs or growing fast. It shows not just what’s in your account, but also what’s committed, owed, and on the way.
If you’re working with grants or running several projects at once, accrual is a tool that you’ll want. It helps you and your funders see the full, true financial picture.
What is accrual accounting? What is cash accounting?
Accrual and cash are the two ways of factoring time into the way you track your money. You can call them a “basis” of accounting or an accounting method. For example, if someone asks you what method of accounting you use, you would say either “accrual basis” or “cash basis”.
The accounting basis is how you relate your transaction records to time, whether you’re using bookkeeping software or a spreadsheet system.
In cash basis accounting, you use the date when money moves as the date for the transaction.
In accrual basis accounting, you use the date when the money is owed or earned as the date for the transaction.
If you’re a nonprofit organization in the U.S., using the accrual method may make it easier when it comes time to file your organization’s tax return (IRS form 990), but it’s not required. If you’re a small organization that’s just starting out, it may be easier to use the cash basis.
If you’re a freelancer or small business owner, you can choose whether to use accrual or cash basis. The important thing is to be consistent — make sure you’re treating all of your transactions either completely on a cash basis or completely on an accrual basis
What goes into cash versus accrual accounting?
Let’s work through a few examples.
In a cash basis system, if you owe a contractor $500 for work they did in December, and you pay them in January, you would record the expense in your accounting system when it leaves your bank in January.
In an accrual basis system, you would record the expense as a payable in December, and when you pay it in January you wouldn’t be recording a new expense — merely changing the status of the expense from payable to paid.
Same with income: Let’s say a funder sends you an award letter for a $5,000 grant in June, but you don’t actually get the check until September.
In a cash basis system, you would simply record the grant as income in your accounting when you make the actual deposit.
In an accrual system, you would record the award as an invoice to income as of the date of the award letter —a receivable that’s owed to you. When the funds come in, you mark them as received against the award, but you show the income as of the date of the award even though you haven’t gotten the cash yet
How does my accounting method/basis affect the bigger picture?
Cash basis accounting is simpler, but it means you can’t always account for things in the right time period. It’s typically useful for individuals and small, simple organizations without any restricted grants.
Accrual basis is more complex and you typically need a real accounting system to do it correctly, but it allows you to keep a much more nuanced picture of your funds and ensure that you’re tracking income and expenses in the time period they were intended for, even if the banking dates don’t line up exactly. This makes program budgeting and grant reporting much easier. It’s typically best for organizations with more complex finances and a real accounting system like Quickbooks.
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