Two Ways to Track Revenue and Expenses
One of the first decisions you’ll make for your business is how you recognise income and expenses. There are two methods: cash basis and accrual basis. The difference comes down to timing — when you record a transaction.
Cash Basis Accounting
With cash basis, you record transactions when money actually changes hands.
- Revenue is recorded when you receive payment
- Expenses are recorded when you pay the bill
Example: You send an invoice on March 1st for $2,000. Your client pays on April 15th. Under cash basis, you record the $2,000 as revenue in April — when the money hits your bank account.
Pros
- Simple and intuitive — it matches your bank statement
- Easy to see how much cash you actually have
- Straightforward for tax planning (you’re taxed on money you’ve received)
Cons
- Can give a misleading picture of profitability
- Doesn’t show money owed to you or money you owe others
- May not meet requirements for larger businesses
Accrual Basis Accounting
With accrual basis, you record transactions when they’re earned or incurred, regardless of when the money moves.
- Revenue is recorded when you earn it (when you deliver the service or product)
- Expenses are recorded when you incur them (when you receive the goods or service)
Example: Same scenario — you invoice $2,000 on March 1st, client pays April 15th. Under accrual basis, you record the revenue in March — when you earned it.
Pros
- Gives a more accurate picture of your business’s financial health
- Matches revenue with the expenses that generated it
- Required for businesses above certain revenue thresholds in many jurisdictions
- Better for planning and forecasting
Cons
- More complex to manage
- You might owe taxes on income you haven’t collected yet
- Requires tracking accounts receivable and accounts payable
Which Method Should You Use?
Here’s a general guide:
Cash basis is often best for:
- Sole traders and freelancers
- Very small businesses with straightforward transactions
- Businesses that get paid immediately (retail, food service)
- Businesses under the revenue threshold that requires accrual
Accrual basis is often best for:
- Businesses that send invoices with payment terms (Net 30, etc.)
- Businesses with inventory
- Companies that want an accurate picture of profitability each month
- Businesses planning to seek investment or loans
A Practical Consideration
Many small businesses start with cash basis because it’s simpler, then switch to accrual as they grow. Some tax jurisdictions require accrual basis once you exceed a revenue threshold — check with your accountant about what applies to you.
How Fastbooks Handles This
Fastbooks supports both methods. When you set up your business, you choose your accounting method, and all your reports and records will follow that approach consistently. If your needs change as your business grows, you can work with your accountant to make the transition smoothly.