Cash Basis: Records income when cash is received and expenses when cash is paid. Simpler but less accurate. Common for very small businesses.

Accrual Basis: Records income when earned (invoice sent) and expenses when incurred, regardless of payment timing. More accurate and required for businesses with inventory or seeking loans.

Example: You invoice $5,000 in December but receive payment in January.

– Cash basis: Records income in January

– Accrual basis: Records income in December

Most businesses over $1M revenue should use accrual basis.