Cash Vs. Accrual Accounting: Which Method Suits Your Small Business?

One of the first financial decisions a small business owner must make is how to recognise income and expenses — in other words, choosing between cash basis and accrual accounting.

Each method offers a different view of your financial position and has implications for tax reporting, cash flow management, and compliance. Here’s a practical breakdown of both methods, their pros and cons, and how to decide which suits your small business.

What is Cash Basis Accounting?

With cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when cash is paid out. It’s a simple, straightforward method that reflects your actual cash on hand.

Example:

You invoice a client in March but receive payment in April. Under cash basis, the income is recorded in April, when payment is received.

Best Suited For:

• Small businesses with low transaction volume
  
• Businesses focused on cash flow monitoring
  
• Those not required by IRAS to use accrual accounting (e.g., smaller, non-GST registered businesses)
  

Pros of Cash Basis:

• Simple to manage — easy to track income and expenses
  
• Clear picture of cash flow
  
• Less paperwork — fewer adjustments or accruals
  

Cons of Cash Basis:

• May misrepresent profitability (e.g., large invoices unpaid won’t show as income)
  
• Not suitable if you carry inventory or offer credit terms
  
• Not accepted for larger companies or GST-registered businesses in Singapore for tax reporting to IRAS
  

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What is Accrual Accounting?

Accrual accounting recognises income when earned (even if not yet received) and expenses when incurred (even if not yet paid). This method gives a more accurate picture of profitability and financial health over time.

Example:

You invoice in March and receive payment in April. Under accrual accounting, the income is recorded in March, when it was earned.

Best Suited For:

• Businesses with inventory or credit terms
  
• Companies needing detailed financial insights for planning
  
• GST-registered businesses or those required by IRAS to comply with Singapore Financial Reporting Standards (SFRS)
  

Pros of Accrual Accounting:

• Provides a true reflection of profitability
  
• Supports better long-term planning and analysis
  
• Required for larger businesses and GST-registered companies in Singapore
  

Cons of Accrual Accounting:

• More complex — requires tracking receivables and payables
  
• Can mislead cash position if profits are recorded but cash is tight
  
• May need professional accounting support to maintain accurately
  

What does IRAS Require?

In Singapore, IRAS accepts both methods for small businesses — but if you are:

• GST-registered, or
  
• Required to prepare full financial statements for ACRA,
  

you’ll likely need to adopt accrual accounting to meet compliance standards.

Businesses earning over S$1 million annually or managing inventory generally must use accrual.

How to Decide: Cash Vs. Accrual

Summary

Choosing the right accounting method depends on your business’s size, complexity, and compliance obligations. While cash basis may work for very small operations focused on simplicity, accrual accounting offers more insight and is often required as your business grows.

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