Accrual vs Cash Basis Accounting: Differences and How to Convert
By SimplyCPA · 24 October 2026
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- Cash basis: Revenue when cash is received; expenses when cash is paid.
- Accrual basis: Revenue when earned; expenses when incurred — regardless of when cash moves. US GAAP requires it.
- Converting revenue: Cash collected + ending receivables − beginning receivables (and adjust for unearned revenue).
- Converting expenses: Cash paid + ending payables − beginning payables, then adjust for prepaid expenses.
- Tax and special frameworks: Many small businesses may use the cash method for tax, and cash-basis statements are a special purpose framework for auditors.
The difference in one line each
- Cash basis — record revenue when cash comes in and expenses when cash goes out.
- Accrual basis — record revenue when it's earned and expenses when they're incurred, whenever the cash moves.
A consultant who finishes a job in December but is paid in January has December revenue on the accrual basis and January revenue on the cash basis.
Why US GAAP uses accrual accounting
Accrual accounting shows the resources a business controls and the obligations it owes, and it reports performance in the period it actually happened. Receivables, payables, prepaid expenses, unearned revenue and depreciation all exist because of it. Financial statements prepared under US GAAP must use the accrual basis.
Converting cash basis to accrual basis
The exam's favourite version: you're given cash figures and opening and closing balances, and asked for accrual revenue or expenses.
Revenue. Cash collected from customers $50,000; accounts receivable $8,000 at the start of the year and $12,000 at the end.
Accrual revenue = $50,000 + $12,000 − $8,000 = $54,000. (Receivables went up, so more was earned than collected.)
Expenses. Cash paid for operating expenses $30,000; accounts payable $5,000 at the start and $3,000 at the end; prepaid expenses $2,000 at the start and $1,000 at the end.
Step 1 — payables: $30,000 + $3,000 − $5,000 = $28,000.
Step 2 — prepaids: a fall in prepaid expenses means $1,000 of last year's payments was used up this year, so add it: $28,000 + $1,000 = $29,000.
Unearned revenue works the other way round from receivables: an increase in unearned revenue means cash came in that hasn't been earned yet, so subtract it.
Where cash basis still appears
- Tax — many smaller businesses may use the cash method for federal income tax if they meet the gross receipts test (the threshold is indexed for inflation each year). IRS Publication 538 explains the accounting methods.
- Special purpose frameworks — cash, modified cash and tax-basis financial statements are not GAAP. Auditors report on them under the special purpose framework rules, a regular AUD topic.
Practice MCQ
A company collected $90,000 from customers. Accounts receivable fell from $15,000 to $11,000 during the year. What is accrual-basis revenue?
(A) $86,000 (B) $94,000 (C) $90,000 (D) $101,000
Answer: A. $90,000 + $11,000 − $15,000. Some of the cash collected was for last year's sales.
The building blocks are covered in our FAR conceptual framework notes.